Since I have no desire to go to China, I am thankful for my contacts who do! (To paraphrase Chris Farley from the movie Tommy Boy, you can stick your head up the backside of a cow to see a good steak, but why not just take the butcher’s word for it?)

The nice thing about currencies is that the categories of information and the pricing structures vary little around the globe. For instance, if you were looking to add a retail stock to your portfolio, the numbers you’d look for in an American company may not be the numbers you’d think important in China.

Instead, the numbers that we care about when looking at currencies are bigger and easier to compare.  Is an economy expanding or contracting? More importantly, why is it doing so? Is it expanding because of government stimulus? What is the ratio of new stimulus to new growth? What likelihood is there that growth will continue if stimulus is removed? Is the stimulus about to be removed? Are rates falling or rising? What is the government policy toward the currency? How about debt ratios to GDP?

All of these are important considerations in the forecast of a currency. And we will consider some of them today in relation to China.

Now let me begin by saying that like with all good stories, China has two sides, a boom side and a bust side. There are those who are bullish on China, and those who are bearish. If I do a good job today, you’ll have a decent idea of the arguments from both sides.

Let’s begin with the headline figures.

China’s most recent numbers for growth as measured by GDP and posted by Trading Economics come in at 10.7%. But we also know that China’s growth has been based upon sizeable stimulus  — $586 billion at last count. It’s pretty remarkable, even if it comes nowhere close to U.S. stimulus spending. We spent 25% more in our first round of stimulus alone, and as much as $1.5 trillion (in various forms) altogether.

As a ratio to population, that makes the U.S. stimulus 10 times the size of the Chinese stimulus. So why aren’t we seeing 10% growth rates like the Chinese? Actually, if we’re spending 10 times per capita as much, why aren’t we seeing 100% growth rates? Seems like a straightforward equation, doesn’t it? It would be, if it weren’t for other “mitigating” factors. (Perhaps the most outstanding is debt, but more on that another time.)

China’s interest rate is 5.31%. Its inflation rate, 2.7%. Jobless rate, 4.3%. All told, some very nice numbers. But let’s continue: exports are reportedly up 45%; imports of crude oil nearly 60%. (Although, please bear in mind, China is no more free of number manipulation than any other country. And in this recession, we’ve learned a lot about number manipulation…)

So let’s summarize. China’s interest rate, while not as low as the rest of the world, is still low by recent standards. There was a time, only 20 years ago, that rates under 8% were considered absolutely bullish for equities. (Seems hard to imagine now.) So at just over 5%, that’s not too bad. Official inflation is not yet out of control… still below the 3% level, and most folks in the United States (especially the administration) would be doing cartwheels in the street for a jobless rate below 5%.

And yet all is not well.

ECONOMIC SHANGRI-LA: TOO GOOD TO BE TRUE?

The problem is, China has a bubble, which is inflating even as we speak, although the government is trying very hard to keep a lid on it. The bubble is similar to what ours was… real estate and housing.

Across much of the country, housing prices rose 10% last year. But in the special economic zone of Hainan (largely comprised of an island off the southeast corner of the mainland), house prices rose 50%! The geography and designation of Hainan is important. It is the largest of the special economic zones, where free enterprise is blossoming. But a 50% rise in housing prices is not “under control” by any definition. If houses are skyrocketing in the prosperous zones, it’s evident that the People’s Bank of China has no more clue on controlling price inflation than the Fed does. Also, how much more difficult does it become to translate the positive economic changes of Hainan to other less fortunate parts of the country without creating the same problems?

Also consider what has really been taking place. The Chinese government hasn’t really had to face how to export these changes to poorer, rural areas, since many of the peasants have flooded into the cities in search of the new jobs. After 1,000 years as an agrarian society, the country estimates it will be majority urban in just five years.

SAVING VERSUS SPENDING: WHAT WOULD YOU DO?

The Western media continues to perpetuate a popular myth — the myth of the Chinese consumer. In the United States and Europe, the average savings rate is very low. One reason is because the American and European consumer doesn’t need to save. If something happens to his job, he doesn’t need a rainy day fund. He has a myriad of social programs that he will eventually qualify for.

So while I personally have no desire to live in a country with a welfare “safety net,” one of the upsides is this: When the bureaucracy fumbles the ball and drops the economy on its ear, the unemployed just collect their benefits… and maybe eventually food stamps or heating assistance or whatever the government may dole out.

But up until relatively recently, China was not the same. You lost your job, you lost your income. Period. The government didn’t provide unemployment insurance. There weren’t any food stamps. Bills come in you can’t pay? Too bad. You lost your house. You went hungry.

Even now things aren’t much improved. The welfare that exists is inefficient and rife with corruption. So the Chinese are more inclined to put some money away for a rainy day instead of spending.

Here in the West, our GDP is 70% direct consumerism. In China, it is only 30%.

But do you think it is likely that the Chinese will undo generations of spending and saving habits overnight? No way. The American consumer is paying off the debt form his “big party”… I guess his European counterpart is as well. We will not continue to buy exports. And for the reasons just stipulated, the Chinese won’t be picking up their own slack domestically either.

THE ACE UP THEIR SLEEVE

All that being said, China is still able to fund more stimulus if it should so desire. But as King Solomon asked, “Can a man take fire into his bosom and not be burned?”

In other words, while China may be able to keep the illusion of growth going for some time yet, it has bought into the same failed model of Keynesianism that the West has used. It is already combating bubbles, even though its official inflation rate is not in the red zone. If it continues to put the brakes on its red-hot economy, we can certainly look for a second dip into recession.

Its first round of stimulus was equal to just under 15% of GDP. With the stimulus funds they created jobs. It can afford to keep going it from a treasury standpoint. It has to afford it from a social unrest and upheaval standpoint. But the big questions remain can they afford it — and can they control it — from an economic standpoint.

My vote is obviously, no. And there has already been some evidence of it. China used its last round of stimulus to build the largest shopping mall in entire world. It now sits 99% vacant. The Chinese government is not very proficient at allocating capital.

So they may be able to manipulate it for some years yet. But NO central bank, dealing with a FIAT CURRENCY, has ever won at this game.

Regards,
Bill Jenkins
Whiskey & Gunpowder

March 22, 2010

Is China Going Boom Or Bust? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

As you may know, California is bankrupt. That ball got rolling back in December 1994, when Orange County declared bankruptcy. Once one of the most prosperous districts in the state, it watched a pool of riskily invested and highly leveraged money go south, and the game was up. After losses totaling $1.6 billion, a liquidity trap was sprung from which Orange County’s Treasurer Tax-collector Robert Citron could not escape.

Although considered somewhat of an isolated incident, it wasn’t long until related problems began to emerge. Now the state faces endless traffic jams, aging schools and hospitals, falling cash accounts and an annual budget more dependent on volatile tax revenues than at any time in state history. And it looks like the crunch will come to a head under Gov. Arnold Schwarzenegger. But here’s the real problem.

All by itself, California is the eighth-largest economy in the world. So its bankruptcy would spell trouble for those that are interconnected with it — especially neighboring states that depend on California’s economic machine for their own growth.

But does California care? It doesn’t seem that way. Its state budget is larger than any other in the United States ($56 billion). And yet that still isn’t enough money to keep it out of trouble. It refuses to live within its means, and is determined to borrow at ever-increasing levels. For proof, remember that California voters rejected a bill that was really called, “The California Live Within Our Means Act.”

Why the arrogance? Perhaps it believes the Fed will step in with a bailout. After all, billions and billions have been given to private corporations… why shouldn’t a state benefit equally — especially if it would sink the U.S. economy otherwise?

But the corporate bailouts came with strings attached. So it’s easy to see the government telling the state to take action to get out of its mess. Reduce spending, cut programs and implement austerity programs until California’s budget is actually balanced.

Then make the very real threat to exorcise it from the Union if it doesn’t comply.

I’m sure you’re saying, “Wait, wait, hold the phone! Nobody is talking about this. There’s no chance that California is going to be kicked out of the United States”

And I am sure that you’re right. But we’ve heard very similar language used when it comes to talking about Greece and the European Union. And, in fact, that’s what today’s commentary addresses. Is it more likely that Greece will be removed form the European Union than that the state of California will be removed from the United States? After all, there are some similarities that make the comparison of the two cases worth considering.

Will California Go Greek?

Each party, Greece and California, are members of a union or conglomerate of political entities. Each one shares a united currency with the others in the union. Each one has particular trade interrelations as well as financial interrelations with others in the union. Lastly, each is “bankrupt,” and that has a certain dilatory effect on those around it.

As you may know, Greece has gotten a lot of bad publicity of late, and it has really hurt the euro — down around 10% in the last few months alone. Does the negative position of the Greek economy warrant such a drag on the European Union as a whole? Generally, they are only considered to be about 2–3% of the economy as a whole. California, on the other hand, is a little more than 10% of the U.S. economy as measured by GDP.

Thus, in theory, Greece should only drag down the euro by 3% on balance, but California should drag down the U.S. dollar by 10%. Overall, then, the USD should have fallen total of 7% against the euro… all things being equal.

But the problem is — all things are NOT equal. Here’s why.

California is a part of a 235-year-old republic. Even though it has not been a member for that same period, it nevertheless is a part of a union that has stood many difficult tests of time.

On the other hand, the European Union is still an experiment. It is barely out of adolescence, and we don’t know yet if it will even grow to stand among the older economies of the world. Also, even though both parties are entities in union structures, the structure of each union is different and addresses problems differently. The long and short of it is that California’s position in the United States is significantly more substantial than that of Greece in the European Union.

So right now California looks like a keeper and Greece a goner. If Europeans are reluctant to break up their happy (till now) Union, they only have a few options:

1. The European Union offers “solidarity” but no financial support.
2. The European Union offers a unified fiscal support from all members.
3. The European Union designates the stronger countries to subsidize the Greeks.
4. A mixture of numbers 2 and 3. Many have maintained that a bailout would be a violation of the Maastricht Treaty, the paperwork that created the European Union. However, the treaty itself is somewhat like a vicious dog that has no teeth or claws.

Here is an excerpt from the consolidated treaty, a piece that is commonly called the “No Bailout Clause”: The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. There you have it… NO BAILOUTS.

However, when a member does get into fiscal hot water, that language is no longer effective or applicable. At that point Article 100 takes over. It reads: Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken. NOW, there you have it… BAILOUTS PERMITTED.

I only give you that so you are aware that bailouts can and will be formulated in the upcoming disasters. And they do not violate the treaty itself.

However, the bigger question remains, if the European Union allows fiscal support for Greece, does that mean carte blanch permission for others to run to the EU money window and collect assistance for their carefree spending days?

It certainly seems to me that if the European Union makes this decision, which, as we have seen, is fully allowable by law, it will lose all credibility. And that may be the only thing that stands between them and ruination of the Union. It may end up collapsing on itself, even if no members ever leave, and its downfall will be the loss of confidence in the currency.

So then, how much further could the euro fall? Could it go all the way to parity? Most certainly. But before that point we will likely see many waxing and wanes of each side of the currency pair. We see a little rebound in risk appetite.

But what does all this mean for the United States and its currency?

The United States

Philosophically and economically, the United States is on a rendezvous with history… unfortunately, the path we are taking is a crash course. Many people have to come realize that we are nearing the end of a gigantic global economic experiment. No one has really walked this particular path before. A circumstance where every major nation in the world (and many minor ones too) is utilizing paper currency that has no backing of any value except for the promise of the issuing government. And we have all come to see what that is worth.

And as the saying goes, the bigger they are, the harder they fall. No currency is bigger than the U.S. dollar. No economy is bigger than that of the United States. When it comes, great will be the fall of it. Fortunes will be made. But so long as it remains the reserve currency, it is very difficult (although not impossible) for it to collapse.

It is difficult because each time it falls and gets cheap to buy, there are many who still buy it because the majority of the world’s goods are priced in U.S. dollars. So when the dollar gets cheap, so do the world’s commodities to those who are buying in currencies other than the dollar.

For us here in the United States, a cheaper dollar means more expensive everything: gas, groceries, cars… you name it. But when the dollar is cheap and other currencies are strong, it becomes a good time to stock up. Such buying will continue to prop up the dollar until a different reserve is found or created. Since such a thing will not occur overnight, the prospect for currency fluctuation over the next several decade — and our opportunity to profit from it — will be tremendous.

But make no mistake: the dollar is in trouble — one foot in the grave and the other on a banana peel.

Regards,
Bill Jenkins

February 19, 2010

Will California Be Removed from the United States? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Ok, so we get the point. Pundits portrayed this as an opportunity to revive the “Hope and Change” which had mysteriously disappeared. But let’s face facts. All the speeches in the world, no matter how good, or how inspiring, are not going to effect the change that is really needed.

These do-nothings could not even pass the economy-reshaping healthcare bill. What happened there? Did they really want to pass it at all? How could a democratic president, with majorities in both houses of Congress, fail to pass what would have been landmark legislation? A defining moment of the current Presidency and our “dear Aunt Nancy.”

The populace be danged. We have a chance to make history here. Who cares how fired up some know-nothing rednecks might get at town meetings. Here was a chance to do something “for the people” who are obviously too stupid to know how good it would be for them. This is just the kind of power play the Nanny-Statists love! And they had all the “power” to do it. But they let the “moment” slip through their fingers…thank God.

Just as the healthcare plan failed, so is will the presidency. Last week a Wall Street Journal NBC Poll showed that voters held a 61% no confidence view on the president’s plans. Failure. Humiliation. Defeat.

How else can you describe the healthcare flop?

But let’s move on from a review of recent history, to a prediction of the near future.

It has been noted that the president moved from pushing healthcare to creating jobs. Good move, Mr. President. The simple smoke and mirrors approach of Washington Politics…cover a failure with blowing smoke (“Those stinking Republicans thwarted my precious healthcare agenda…”) then shifting the mirrors to reflect what troubles folks most about this economy…jobs.

Several years ago, there was a best selling business book entitled, “Who Moved My Cheese?” I hear they are coming out with a sequel, “What Happened To My Job?” That is going to be enhanced by the Hollywood film blockbuster, “Honey, They Shrunk My Income!”

Now, all tongue in cheek aside (well, at least some tongue in cheek) let’s get to the “issue du jour” on the revamped presidential agenda. Because let’s face it, if the economy doesn’t make a turn for the positive…if there aren’t signs of real success that the media can parlay into a picture of a wise and benevolent administration, we will be looking at the first one term president that the US has had in a very long time.

It has long been a major tenant of this shot drinker at the Whiskey Bar, that the Government does not create jobs. Sure they can give a man a shovel. They can have him dig a hole. They can pay him for that with inflated money. Then they can have him fill in the hole. They can pay him again. And that’s what appears to happen time and again.

The problem with government jobs is generally two-fold. First, we know that they are expensive. Second they are not productive. Thus, the very nature of government work, is to funnel money from the private sector to pay for these jobs, and then to see that little or nothing is produced. Where nothing is produced, nothing is sold. Where nothing is sold, no income is created. Where no income is created, there is a fiscal loss.

But not for the government. They have no bottom line. They have no “mandate” from the masses to produce a profit. The current “mandate” from the electorate has been “Give me a job.” Or “Subsidize my healthcare.” Or, “Give me a cheap mortgage.” Ignoring all the basics of economics…scratch that…ignoring the ONE basic of economics, government is not required by the “masses” to produce a profit.

Sheesh…they haven’t even been required to BREAK EVEN!

Certainly we can see that the speech last week did not highlight this point…Balancing the National Budget. We will just continue to spend our way to prosperity. And nobody will care, just so long as in our spending, we are creating jobs…

The President, in his acknowledgement that government should do something to help “create jobs”, also stated that 70% of all jobs in the US are created by the private sector. To that end, the Admin introduced a tax break for small businesses who hire people this year…$3,000.00. Whoa! “Hey there, Big Spender!”

What kind of economic sense does that make? How in the world is a business going to benefit from a $3,000 tax break, when his cost of hiring a worker is likely in excess of $25,000? It is true, if his business is expanding and he needs to hire workers, this benefit will help him. But no business is just going to go out and hire workers at a $22,000 per annum loss. In short for this to work, we need businesses that are e-x-p-a-n-d-i-n-g. Unfortunately, should Obama be lucky enough to preside over an expanding economy, he won’t be looking to tax cuts, but tax increases. Does the term bass ackwards ring a bell around here?

Nevertheless, the prevailing theory is that “…the government can create circumstances which create jobs”—this was actually stated in the speech last week. And I suppose that this tax incentive is what they deem as creating the circumstances that create jobs. But the truth is, the circumstances for creating jobs already exist on their own.

They exist without government help.

They exist without government subsidy.

They exist without government entitlement.

The work of business is an arena completely outside the sphere of government altogether and has nothing to do with it. Interference by trying to “improve” such circumstances only backfires in the end.

For example, the “Cash for Clunkers” program which was supposed to stimulate sales and keep auto jobs alive here in the US, provided a spike in sales temporarily. It was deemed a Government/Business success. But what is rarely reported is how it nearly destroyed the used car sales business in certain portions of the country. In my own area here in the mid-Atlantic, my car dealer contacts have been forced to close their lots, because they cannot get inventory (since the infinite wisdom of the “C4C” programs’ designers was to destroy the old trade-ins). I have good friends, who have been in the business for years, now being forced to leave their line of work, and go job hunting. Thank you, Barack the Beneficent.

The best thing the government can do for job creation, is to get out of the job creation business entirely. Do not offer tax incentives, just stop taxing altogether. The income tax reaches everyone, so leave it at that! The less the government does to “help” business, the better off every one is.

Just ask our friends in American Samoa. On a remote island in the South Pacific, far west of the Hawaiian Chain, we have attempted to extend our omniscient and all kind influence once again. Here on this happy island, where the average income is just $4,000.00 per year, 80% of the economic activity was provided by two separate tuna canneries.

In their infinite wisdom, Congress decided to “help” the Samoans by instituting the minimum wage policy. Happy Day! They’ll all be rich in no time. And the dirty, filthy, stinking canneries will that have kept these fine people so long in virtual slavery and penury will finally get their come-uppance!

Oh how well this has worked in our own land, sacrificing jobs and creating unemployment! Only the most obstinent and ill informed still maintain that the minimum wage increases the standard of living.

The effect on American Samoa?

One of the tuna canneries has already left, and the remaining one is looking to other shores. Great job, Congress. The average annual income should drop below $1,000.00 per year thanks to your creating better circumstances.

Here is a prime example of what happens when the Nanny-State attempts its improvements. In such a simple economy as you would find on this tiny island, with very few other factors to wrestle with, and no other influences to calculate, the soft glove of the State covers an iron fist. Not content destroying lives on our own shores, we have to spread our infectious foolishness to the destruction of others.

Let the prayer of our Revolutionary Forefathers ascend loud and long from the bar, “Good LORD, deliver us!”

Regards,
Bill Jenkins

February 2, 2010

Government Cannot Create Real Jobs was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It’s elastic. And, boy, oh boy, can it stretch. You see, if governments cannot operate under paper money, they can’t inflate the currency. If they can’t inflate the currency, then they can’t spend with reckless abandon. Perhaps you’re asking yourself what rising prices have to do with government spending. And if you haven’t been around this bar much… that’s a very good question. So let me sum it up quickly.

The basic theory of government operation as it is taught in school and propounded by the media is that the government spends money to provide us services that we would be unable to provide ourselves. To pay for those services, they extract from us, you guessed it, TAXES.

STOP! Wait! Don’t you believe it!

The amount of taxes collected here in the United States last year would not have been enough to fund Social Security and Medicare. It’s hard to believe, but true. So where does all the money come from to pay for the infinite number of other expenditures of the federal government?

How do they pay for schools? Not just the aging and dilapidating buildings, but the books, supplies, teachers and the massive bureaucracy? How do they pay for the military… guns, tanks, soldiers, computers, jets, ships, submarines and planes? How do they pay for the Senate, House, Supreme Court, president, Secret Service, CIA, FBI, NSA, NASA, DOJ, DHA, HUD, DHS, ATF, IRS? Not to mention welfare programs of multitudinous varieties, college grants and national parks. How do they pay for all this? By means of two devices about which the man on the street knows little.

The first is through bond and Treasury auctions. We — as in “we the people’ — sell these instruments to people who believe that we are a good risk. Then we pay them to let us borrow their money. Of course, borrowing money costs money… it’s never free. But when a country borrows more than it takes in by taxation, because it is spending more than it takes in by taxation, the result is a growing debt problem, which never gets paid down. So how can the United States, or any country, continue on this cycle of never-ending borrowing? Not to worry, my friend. Because here is where the second device comes into play.

Countries begin paying off their debt with money that they “print.” It is commonly called monetizing the debt. It’s not hard to understand, but they try to make it hard. When you’re stealing from your citizens, it is better if they don’t know it. If you make the example and the problem personal, it all falls into place.

If I had a nearly endless source from which to borrow, some deep-pocketed uncle for instance, I could borrow from him indefinitely, as long as I could pay him back in money that I printed myself. If he did not know the money I gave him was fake, or if he just didn’t care, I could continue that scam in perpetuity. I could borrow millions… billions… TRILLIONS! But let’s not get ahead of ourselves.

Technically, I could only borrow from him until he was out of money. Right? Well, no… not exactly. If he had creditors who would take my fake money as real money, he would never have to stop lending. Until someone held his “wallet to the fire.” That is essentially what is happening. Only it is our Uncle Sam who is doing the borrowing. Then he prints his own money and uses it to pay his bills to his creditors around the world. Up until recently, our creditors had to take it. Because we had the bully power to force it on them. Plus since all the countries in the world were doing the same thing, our funny money was considered the best. That gave it some sort of intrinsic value.

But now there are currencies more valuable than ours. And now we do not have the military firepower to force it on others. Some feel that means that the whole jig is up. If our paper money is refused, then everyone’s paper money will be refused. But just because our government has spent us into trouble and is trying to make it worse with bigger and bigger spending projects from stimulus to healthcare doesn’t mean that the other major economies of the world are ready to throw in the towel. Indeed, if they can hang on, they will, because perhaps they will move into the position of world’s reserve currency and can produce prosperity out of nothing, all while impoverishing their citizens and neighbors.

Thus this will be but another round in dumping the dollar. The other currencies will look out for themselves. And playing those currencies could mean more currency option opportunities for us.

Regards,
Bill Jenkins

December 11, 2009

Government’s Shell Game of Taxing, Borrowing and Monetizing Debt was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Pound up…

Euro down…

Aussie pulling back…

Canadian giving way…

Yen losing ground…

October is coming to an end, and we haven’t really seen hide nor hair of any terrifying market moves or monstrous returns to the old days of dollar safety, when anything that even had a scent of risk was spurned as foolhardy investing.

But as of now, the dollar has been tanking and anything that is paying a higher interest rate has been soaring, thanks in part to the hawkish comments and actions by the Reserve Bank of Australia, but mostly due to the boneheaded actions of the United States.

Any way you put it, when a man shows up and says, “Hello! I’m from the government and I’m here to help” — RUN. As fast as you can. RUN.

We are following in the footsteps of Japan. Should this continue, we will have to replace our Stars and Strips with a new flag, ”The Land of the Setting Sun.”

No Happy Ending for the Dollar

We’re now at a 9.8% unemployment rate, and we lost a jaw-dropping 263,000 jobs in September. Now it’s true this isn’t the 700,000 we were losing not so long ago. But it still is not awe-inspiring evidence of a recovery.

The euro’s meteoric rise was on the G-7’s agenda this week. But before we start jumping up and down for joy as the powers that be begin pushing the euro back down (and the dollar up), I must confess that I smell a rat.

The folks at the European Central Bank have not been too worried about the strengthening euro up to this point. That could always change. But for now, they seem to be enjoying this appreciation. For them it acts as a nominal rate increase, which will keep inflation in check should it appear. But don’t get me wrong. Central bankers are men just like us (only often with a lot less common sense). They can get blinders on and only see things a certain way. After all, don’t all humans usually see things the way we want to see them? And this can handicap them when it comes to reading the data — the same way it can handicap us. Should they allow the euro to rise too much and too early, it will crush their budding recovery… much to their surprise and chagrin.

That being said, the dollar is in a bad way. Aside from the sheer size of its GDP, and the fact that historically it has managed to pull its fat out of the fire, I’m not sure what we can look at currently to construct any happy outcome for the dollar. That’s it, plain and simple.

The Dollar Will Be Let Down Gently

But nothing, not even the dollar, falls all at once. Hence all this jawboning about the euro (and yen, while were at it) being too expensive. None of these foreign economies can afford to let the dollar fall too much, too quickly. Thus, if they continue to badmouth the strength of their own currencies, it buoys the dollar and gives them opportunities to get out at a better price. But they can’t dump too much on the market all at once. If investors get wind of that, the big boys will have a harder time getting their target price.

So it seems to me that we should be looking for another return to dollar strength. That would play right into the hands of foreign economies that are looking to quietly unload the dollar. It is also the reason I don’t think we should look for the dollar to go into freefall — it is simply too costly for our trading partners. I believe they will do all they can to allow themselves an exit at a decent price.

No matter what may happen to the dollar’s reserve status in the decades to come, it will retain this status for a long, long time. Thus in this great tug of war between the currencies, there will always come periods when the dollar will be viewed as too cheap, and those who need it for continued trading purposes will not be able to resist the drive to buy it.

No Dollar Strength from This “Recovery”

For our last note, let me reassure you, dollar strengthening will not come as a result of the recovery we are supposedly in.

The stimulus has not performed as promised. A quick look at the figures from last November to the present will reveal it was no panacea:

Unemployment
November ’08: 6.6%
October ’09: 9.8%  (up 50%)

GDP
November ’08: $14.3 trillion
2nd quarter ’09: $14.1 trillion (down .25%)

Housing starts
November ’08: 655,000
October ’09: 590,000 (down 10%)

Food stamps participants
November ’08: 31.1 million
July ’09: 35.9 million (up 15%)

Home mortgages underwater
November ’08: 15 million
October ’09: 25 million (up 66%)

Deficit
November ’08: $450 billion
October ’09: $1.5 trillion (up 300%)

Looking for a Dollar Bounce

Let’s sum up. I am looking for a bounce in the dollar (and I have been since mid- September). I thought that perhaps the fall season might be enough to bring it on. That hasn’t happened. That’s not the same as saying it isn’t in the cards. We are now in the midst of the new equities earnings season. J.P. Morgan produced stellar figures that pumped risk appetite into the market strong and hard. Other corporations may not be able to do as well.

It seems to me that this rally is already on thin ice. At any rate, the dollar will bounce. It will likely end up being a bigger move than most anticipate and it will be fueled by fear and short covering. Then, when the big boys have had enough, the course will be reversed, fundamentals will resume their place, and the dollar will begin its drift toward the nether regions once again.

It is a treacherous pathway before us, but it should yield us some really nice profits if we position ourselves accordingly.

Due to the increased interest in currencies, the NASDAQ now offers an easy way for anyone to play up to ten currencies against each other. Click here to for the full fact sheet on the NASDAQ currency options. So you can do your positioning to take advantage of the coming strength in the dollar…and in the dollar’s ultimate decline.

Regards,
Bill Jenkins

October 22, 2009

Dollar Strength Then the Decline Resumes was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

They talking, of course, about the Australians decision to hike their central bank index rate. And instantly the howls of recovery were on the lips of all the pundits.

But the recovery at large is still not on the horizon.

We may be facing a serious battle with deflation, and that the evidence is all around us, Australia notwithstanding. And now we have seen more than just anecdotal evidence.

A few days ago, the United Kingdom, which has been struggling with a weakening currency, released inflation numbers far below expectations. Not only was inflation lower than expected; the figures were actually negative.

What does that mean? Well, when inflation numbers turn negative, that is deflation. And England wasn’t alone.

The number one economy in the Eurozone, Germany, released numbers that said the same thing. Prices are not increasing, they are decreasing… and at a surprising rate!

That’s contrary to conventional wisdom, which says that the bloated money supply should be raising prices. But as I explained last week, that money supply isn’t natural — it’s being created on a whim by the central back and being pushed into its member banks.

From there, it is being held against the mountain of derivative losses, bad loans and investments, instead of flowing into the economy at large through lending.

That lack of lending is what’s preventing inflation. It won’t show up until the money is released to the public. Until then, the money supply has not effectively changed or expanded… and we’ll continue to see deflation.

Deflation, in turn, will lead to longer periods of extended “non-growth” and lower interest rates — at least in the places where they can be lowered. Where they cannot be lowered, “stimulus ad nauseam” will remain the protocol of the day.

But, of course, a flat-broke country can’t stimulate unless it can borrow. We are not like China with $2 trillion in reserves. Staying afloat requires borrowing unparalleled in history. The problem is, now that we aren’t buying the world’s widgets, the world is far less inclined to loan us anything. After all, that’s the way the game has been played. They lend to us — we buy from them. And everybody was happy. But you just can’t borrow forever.

So if deflation is going to be the name of the game, what happens to the currency markets?

Thomas Jefferson Fears the Federal Reserve

To answer that question, first we need to determine which currencies are going to move in which direction. That will continue to unfold over time. But it will likely lead to the currencies of the West doing a slow gyrating dance. Neither currency is better than any of the others, so they will just move back and forth until one of them gets their debt and banking situation under control.

Very possibly, the first nation to get rid of its central bank will be the first to really break out.

Because as we all should be well aware by now, central banks exist for one purpose and one purpose only: to bailout their banker buddies who, in the pursuit of greater profit, have made risky loans… to bail out large industries in order to preserve the job base… and to make sure that the taxpayers foot the bill. They will masquerade it in the best of terms, but at the end of the day, we are paying for their foolish business practices.

The sooner we do away with a central bank, the richer we all will be. This is not our first experiment with a central bank in the United States, but it has been our most costly. Our forefathers vehemently opposed the idea of a central bank for just this reason.

They believed that such a cartel would rape and pillage the public and increase poverty on a massive scale, until there is nothing left to take.

“I believe that banking institutions are more dangerous to our liberties than standing armies,” Thomas Jefferson wrote. “The issuing power of money should be taken away from the banks and restored to the people to whom it properly belongs. The modern theory of the perpetuation of debt has drenched the earth with blood and crushed its inhabitants under burdens ever accumulating.”

Amazing, isn’t it? Here’s a man who, two centuries ago, understood why central banks brought themselves into existence. The Federal Reserve in the United States has done nothing to improve our lot and has done everything it can to extort our wealth by the tax of inflation, then to export it to economies and dictators who live like massive welfare recipients off of the taxes your fathers have paid, and you continue to pay, and your children will have to pay.

And it will remain like this until the Fed is abolished again. As I mentioned, the population of the United States has closed more than one central bank. Former presidential hopefuls even lost their bids to the White House over their stand in favor of a central bank. Until such a day as we are sufficiently educated again to see them as a menace to our wealth and way of life, until we take it in hand to dismantle the Fed as it is, we will continue to suffer the expropriation of our hard-earned money to those who act as our overlords.

Problem is, I seriously doubt that will happen within our lifetimes. Look how long it’s taken us just to consider a bill that audits the Fed.

In the meantime, I recommend you take your capital to the place it’s treated best.

That specific place, however, is yet to be determined. Will it be Australia — the first ones to hike rates? Will be China – the almighty ones holding a financial nuclear option?

I can’t say for sure.

But I can say that, over the long run, it won’t be the greenback.

If you’re looking for a way out, diversifying your savings into another currency through the FOREX markets is an easy way to do it.

Regards,
Bill Jenkins

October 15, 2009

Who Needs a Central Bank? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The Pause That Refreshes

We saw a short reversal in the recovery trade that has benefited the risk currencies, especially Australia, New Zealand and the Eurozone. As of last Tuesday morning when I began this column, the risk push is back on: The euro and Kiwi are pushing new yearly highs with the Aussie hot on their heels. Poor Canada got dumped on due to its poor retail sales but will likely fall back in line.

Let’s look first at the euro. This really looks like a gasping market. It resembles all those that make higher highs on a relentless basis. And when you talk about relentless, the mighty euro sure fits the bill. Until Monday, the euro had not seen two down days in a row for the entire month. That’s remarkable.

But the real question is, does that movement arise from its own strength, or is it something else? I have long been a proponent of an impending euro disaster — and I’ve positioned my paid Master FX Options Trader readers accordingly.

The one thing that would forestall my forecast of disaster would be an intermediate recovery. Please notice two words in that previous sentence — “forestall” and “intermediate.” The euro disaster is not over — it has only been delayed. Like all excesses, it must eventually come to light and be dealt with. A foundation can only be undermined for so long before the structure it supports has to topple.

That’s what has been going on in the United States. And without a doubt, the euro problems are much, much bigger. Moreover, the European Central Bank’s remedies thus far have not been nearly as effective as they have been in the United States. But the second item of note — “intermediate” — is the type of recovery that will allow the Eurozone to gloss over their immediate problems.

Thus it looks like “business as usual” for European banks and businesses. During the boom-boom years, the systemic problems of the Eurozone were easily glossed over. If we can return to that sense of “normalcy” — and believe me, that’s what every central bank is working toward — then the euro and the U.S. dollar will continue to part ways. Mainly because the U.S. problems are all exposed and out there for everyone to see. The Eurozone has managed to weather the storm, keeping its central bank rates higher than the U.S. rates, so it has all the appearances of not needing the drastic measures that America has taken. Ipso facto, it must not be in as bad shape as its North American counterpart.

But the way things seem is not always the way they are. Everybody has to pay the piper, and what you sow is what you reap. There are NO exceptions. So when we sow thievery and oppression, crushing economies to benefit the friends of central bankers, there will be hell to pay. And I’m not just using a figure of speech.

So then, the euro has posted a new high. It doesn’t have the internal strength on its own to continue higher. But as “good” recovery-style news comes out, they keep the Ponzi going.

So what will be the real drive going forward? Let’s take a look.

The Dollar Carries On

First of all, the U.S. dollar is in danger of becoming the currency of choice for the new “carry trade.” We’ve discussed this before, but it’s worth mentioning again — especially for new readers.

Plainly put, the carry trade is when a trader borrows money in a currency with a low interest rate, then uses the proceeds to buy a currency with a higher interest rate. So even though he has to pay interest on the currency he borrowed, he’s making even more in interest with the currency he bought.

Since the interest rate difference is so small, the carry trade is only worthwhile if it involves a tremendous amount of cash. That’s why it’s generally done by the really big, big players. Here’s an example of how it works.

Say an institutional investor borrows a bunch of dollars at a .25% interest rate. Then he uses those dollars to buy, say, Australian dollars, which are paying a 2.75% interest rate. So, he’s losing .25% on the dollars he borrowed, but making 2.75% on the Australian dollars he bought. And he earns that in perpetuity. He doesn’t have to do anything. It just keeps earning money day after day.

For years this has been done with the yen, as it always had the lowest rate of interest. It helped to keep the yen very cheap, which is exactly what the Bank of Japan wanted. It hoped the cheap currency would expand their perpetually receding economy.

Now this same scheme is being done to the dollar. So far, it’s only been in “bite-sized” chunks — but only because no one is very sure if the world economy is out of the woods. Still, unless more bad news comes, this is a profitable trade.

Also, higher interest rates tend to attract more money going forward (as all the scared money comes back into the market) — so the higher-yielding currencies also appreciate against the lower-yielding ones. Therefore, the investor makes a double boon: the interest and the appreciation.

So the big institutions have an interest in depressing the dollar. Any gain in strength or interest rates threatens the easy money of the carry trade.

But, as noted, the institutional players aren’t the only ones who want to keep the dollar down.

Bad Politics = Bad Currency

As I mentioned, the Bank of Japan was all too happy to let the yen carry trade go on, since a weaker currency was seen as a way out of its economic mess. The U.S. government is essentially taking the same route. Without a doubt, it is complicit in driving the dollar lower.

Like in Japan, a cheaper currency helps service ever-increasing debt (I’m certain they have long since abandoned any prayer of paying it off). And the indebtedness is increasing at a faster rate than at any time in history. As long as the major economic power wants to see its currency cheaper, it will do whatever it takes to get that done.

By the time you read this missive, the Fed will be ending their two days of meetings to determine what to do about U.S. interest rates. If you haven’t already heard the answer, what do you think it will be? It is important to formulate an answer to that with all the evidence before you, because it will give you an added insight into how the central bank works. Here’s my answer. They will not be raising rates.

Now that, of course, is no new revelation. But what will they do looking ahead? When will they start earnestly looking at raising rates? The answer to that question lies in our own recovery.

While data appear to show that the economy might be coming out of recession, unemployment is still at multiyear highs and is not decreasing. Housing numbers are improving, but they will NOT be coming back to what they were. All the weight put on housing starts, new purchases, purchases of existing homes, new permits issued, etc., are all a smokescreen. And if not intentionally an “illusion,” it certainly will not make a difference to the economy. Here’s why…

Under the “old economy” (two years ago), a house was a store of value. We all implicitly knew that our savings were not “safe” in a bank, and if they were, they certainly were not growing to keep pace with inflation. So we invested in real estate. I don’t mean that everyone went out and bought rental properties or tried to flip houses. What I really mean is this:

If you ever refinanced your house and took “cash out,” you invested in real estate. If you ever used a home equity loan or a home equity line of credit — you invested in real estate. The unwritten assumption was that your house would continue to increase in value, even as you were using the equity. We became a nation of equity spenders. Treating our homes like ATM machines, we attempted to increase our wealth by means of a bubble market. Even if you didn’t think you understood the nature of a bubble market, implicitly, or even instinctively, you did.

Spending a house’s future earnings meant that we believed our money would be worth less in the future than it is now. We believed its value was decreasing. (Incidentally, we were right.) But we were on the “safe side of the bet.” Because we would spend valuable dollars now, but repay our bill with less valuable dollars later. This is why a 30-year mortgage in a centrally managed and inflationary economy is such a good deal. You lock in today’s price, but pay it off with increasingly inflated money. It is that very inflation that makes your house go up in “value.” Any reasonable consideration would conclude that a house is not as “valuable” after 30 years of living in it. It must depreciate, because it “wears out.” Anybody who has ever owned a home knows this to be true. Defer just a few years of maintenance, and it will soon overwhelm you. Before long, you begin to wonder if you own the house, or if the house owns you.

But in the end, when houses were all in debt up to their value, and many far more than their value, we stopped investing in real estate. Mainly because we couldn’t afford it any more. Either our payments were already too high, or our equity was too low. At any rate, when people stopped “investing,” the residential market began crashing. It will not return to what it was, and vainly hoping for more increases in housing numbers to do that will only bring to pass the old proverb, “He that sows to the wind will reap the whirlwind.” In other words, vain hope isn’t gonna save the farm.

Getting back to the moral of our story, the government, which will not control or reduce its spending, can only raise taxes, cut services or inflate the currency in order to get us out of this mess.

Of course, raising taxes or cutting services are the easiest ways for a politician to lose his or her job. So the third option is always exercised. If done properly (according to prevailing monetary theory), it will be painless, and the effects of inflation will be partially offset by the ever-popular cost of living increase. That way everyone shares in the illusion that they are “keeping up with” inflation. But that’s all it is… an illusion.

So we’re up to two entities with a vested interest in keeping the dollar down — the institutional investors who want the carry trade to continue, and the U.S. government, which needs a weak dollar to plaster over its massive debt.

And the dollar has yet another enemy…

Neither a Borrower Nor a Lender Be

It’s easy to overlook, but when you buy bonds, you’re buying debt. You are loaning the issuer your money and getting their interest rate as your profit. Corporate bonds represent the debt of individual companies. When you buy Treasury bills and the like, you’re buying the debt of the U.S. government.

No nation in the world sells more debt every single month than the United States. Because of our existing budget (that’s using the term very loosely), we are forced to borrow money every 30 days. To pay Social Security, welfare, medical payments, elected officials and bureaucrats, the military, foreign aid, student loans — anything and everything that gets money with a federal stamp on the check.

And we have to borrow it. Somebody has to give us their money with the expectation that they are going to get it back, plus interest (uninflated).

Now, imagine your neighbor asked you to loan him some money, promising to pay it back with interest. A week later, all that money has been spent… so your neighbor asks for another loan. And another. Then another. How much longer would you keep lending him money? Even if he continues to pay the interest he owes you, you still have to wonder how long before he needs to borrow money just to pay the interest he owes you for borrowing the money.

That’s why everyone I know is casting a wary eye on America’s “neighbors” — the countries holding much of the U.S. debt. With our massive spending plans and dim economic outlook, other nations must be worried about our ability to repay our debt. What will we do when the Chinese stop buying? What will happen when the European Central Bank stops buying? What will we do when Japan stops buying? Will the government stop spending even then?

One way or another, the you-know-what is going to hit the fan. Oddly enough, however, foreign investment is higher this year (43.1%) versus last year (only 27.1%). That’s a year-over-year increase of 60%!

So instead of being worried, the U.S. government feels invincible. Foreign countries will always be happy to buy our debt, it thinks, so there’s no reason to adjust our destructive spending plans. It’s like giving more liquor to an alcoholic to sooth his tremors — a short-term fix that doesn’t do anything to solve the problem. Make him feel good enough, and soon he won’t feel anything ever again.

If I were you, I’d position my short-term and long-term currency savings accordingly.

Regards,
Bill Jenkins

September 30, 2009

The Euro, the Dollar and the Future of the Forex was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It’s also the time of year when the Jenkins family winds up plans for an October vacation. This year my family and I are planning a big trip to Orlando. Can’t wait to go. Hoping the pinched nerve that I have suffered with most of the summer will be under control by then.

But as entrancing as all of that news may be, I have something bigger on my mind today.

Setting the Stage: The Big Picture

As just about everyone knows, the stock market crashed in a big way in 1929. Analyst Nick Guarino reminds me that it rallied 15 times before it hit bottom fours years later, having lost 90% of its value.

And the truth is, when adjusted for inflation, the market didn’t break even again until 1960. (If you’re a “buy-and-hold” investor, you MUST account for inflation. It is the single biggest “invisible” tax in our wonderful Fed managed economy.)

But before people could get too happy with making money again, along came President Johnson and the “Great Society.” I don’t know who it was so great for — the market began crashing again in ’66. Once again, adjusted for inflation, it didn’t get back to breakeven for another 30 years.

So, 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines. Of course, they didn’t fall straight down. That’s the “trick” of the whole deal.

Each rally draws in a few more people, a little more money, until there are no suckers left. Then when the bottom hits, it has takes 15-20 years to “recover.”

It will take a very long time to recover from what we’ve been hit with: Exxon/Mobil lost two-thirds of its profits… that’s 66%! The “World’s Company,” GE, saw a 47% collapse in profits. Toyota, the recession-impervious carmaker, posted its largest yearly loss EVER and is looking at losses this year, too. Insurers have been hit. Computer giants have taken a whacking. Even Disney is down over 25% in the third quarter.

These are not “bumps in the road.” They are “driving off a cliff.” By some estimates, inflation-adjusted earnings are down 90% in the last 20 months.

We are now in just the second year of this disaster. We are witnessing an almost perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

At the end of June alone, there were over 5,300 commercial properties in the United States in default. That’s more than double the number from the end of 2008 — and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

So don’t let the recovery pundits fool you, even though they’re out in force.

Setting the Stage: Zooming in Our Focus

No doubt you’ve heard the optimists: “The Recession is over.” “The Recovery has begun.” “Better get in on the ground floor now if you hope to recover all that retirement money you lost last year.”

Just look at the evidence, they say:

* Markets up 50%. In the greatest bull run since the Great Depression, stock indices are forging higher. The numbers are swelling. Ride the wave!

* Housing numbers are turning north. Over the past six months, there have been some the fall in some housing numbers are slowing, and some have turned up. Building permits. Existing home sales. New home sales. New housing starts. Pending home sales. Hmmm… nice!

* Manufacturing looks like it’s exploding. Yesterday the Institute for Supply Management manufacturing index posted a stronger-than-expected rise at 52.9. Well above expectations, and well into the 50+ territory that signals expansion. Looking better and stronger than it has in 2 years. It would be a mistake to bet against it!

But you probably know what I’m going to say right now: Don’t believe a word of it!

The September Syndrome

No market goes up forever. Isn’t that one of the first lessons we learn when chasing a bull market?

This one is no different. Could it go higher? Sure. But just how far can you stretch a rubber band? Eventually, it is going to snap back.

And, as it happens, we’re heading right into “snapback” season.

Historically, the month of September is the worst month for stocks. Hands down. Indices fall more in this month on average than in any other month of the year.

In fact, the S&P has declined in 11 of the past 20 Septembers. You may be inclined to say, “That’s not so impressive.” But an average decline of 10 points is something worth noting. Additionally, 40% of those falls consisted of declines that were 75-125 points. That’s huge. No other month has such an anomaly. And it seems to me that this September may be ripe for the picking.

In fact, the first day of September was a real whopper. And Monday (although technically an August day) was not so august for U.S. equities. Thus, as the calendar turns over, we have two days in the down column. Today is not looking so good, either.

But as bad as September is, October has the reputation for being a real bloodbath. It certainly possesses a number of the largest down and crash days. But in order for a crash of monumental proportions to take place, there has to be some lofty level from which to fall.

I get physically sick when people tell me how they are moving (what’s left of their money) back into equities. I try to reason with them; I try to warn them. It breaks my heart to see pensioners barely getting by. You remember all the drama from recent years, how we were told that the elderly were forced to choose between food and medicine? Do you remember the seniors who were reportedly sharing their cat’s food so they could buy their prescriptions?

And that was during the go-go boom years. I cringe when I think of what lies ahead for them.

Will it start this fall? Has the band stretched far enough? Has Wall Street suckered in all the money that will venture out into the street? That’s all they’re after. Draw everyone out of the woods. Get all those who believe that it’s time to buy and hold into the game again. A 50% rally? Child’s play! This time the Dow is headed for 18,000!

Better tread carefully. This is without question the area of thinnest ice. One misstep by the government, a foolish line slip or a negative surprise, and the entire “recovery” falls like a house of cards.

Keep your money, and your exits, close… and don’t be afraid to take profit.

Regards,
Bill Jenkins

September 3, 2009

Suckers Rallies and the September Syndrome was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

This has been quite a month so far, with healthcare taking center stage in the national debate. There have been rallies, shouting, fights and town hall meetings with unbelievable attendance. And, a line that I’ll bet the president wishes he could take back.

Addressing that he wants us to believe that private insurance will still be available and that you will still have options, President Obama commented, “If you think about it, UPS and FedEx are doing just fine, right? No, they are. It’s the Post Office that’s always having problems.”

Is that really what he intended to say? Does that really offer any rational support for setting up a government insurance program? He admits that the government-run postal service is failing, while its private competitors are thriving. Now, I know that public speakers are famous for their gaffs, but that one directly contradicts what he’s trying to say!

Support for the plan appears to be at an all-time low — according to a recent poll by a Rasmussen, down to just 42%.

But let’s get to the news and some longer-term commentary for the day. According to a Wall Street Journal poll, 98% approve of Ben Bernanke being re-appointed for four more years at the helm of the Federal Reserve. Citing the importance of continuity, he was given overwhelming support for bringing us through the recent difficult times.

Really?

SAME PLAY, DIFFERENT ACTS

One book I recommend reading is The Creature From Jekyll Island by G. Edward Griffin. It is an excellent treatment of the origin and goals of the Federal Reserve. I am surprised at the number of people who have never even heard of this book. It ought to be required reading in all civics classes — if they even teach that stuff anymore. Actually, I was shocked when a friend who I highly respect in our industry recently commented to me that he was just reading this for the first time.

So if you’ve never read it, get a copy. It’s available in plenty of places online. The book is a large one, and intimidating to those who are only occasional readers. But it is well worth the effort, and a real eye-opener as to why things have played out the way they have over the last year and a half.

Tracing the founding of the central bank in the United States, Griffin clearly demonstrates how and why it was formed, and how it is functioning EXACTLY as planned. The Federal Reserve is not America’s first attempt at a central bank, but all others were eventually shut down because they were recognized for what they really are — an attempt to create a cartel of bankers who, with Congressional support (even though they are not a federal agency), constantly overextend themselves in the pursuit of higher and higher profits. And when the game is up, it uses its Congressional “connection” to foist the losses onto the American taxpayer.

It always occurs with the same themes: “Too big to fail”… or “The first domino to fall in a nationwide/worldwide catastrophe.”

Each successive failure became more massive than the previous one, and a strategy emerged — start discussing amounts of money so big that the average citizen was simply mind-boggled by the size of them. As generations of public dis-education came home to roost, people increasingly believed that economics was the realm of governments rather than markets. And with that fallacy came the ingrained idea that money comes from the government, so it is the only entity able to create the resources to “correct” gargantuan fiscal shortfalls.

Of course what “everyman” missed was that the government’s creation of money out of nothing simply fleeced the citizenry in the form of the hidden tax of inflation.

Let’s take a quick and closer look at this sordid history.

I catalogued for you recently one of the failures of the central bank. It was purportedly established to stop market crashes and end recessions. But we have seen recessions in ’53, ’57, ’69, ’75 and ’81, the crashes of ’21 and ’29, the Great Depression I, Black Monday in 1987 and the current lollapalooza of 2008-?

But one of the Fed’s other foundational reasons for existence was to reduce competition from outside banks, as previously mentioned. It also planned to foster an attitude of easy lending, perpetual indebtedness and constant loan rollovers and interest charges. Then when the jig is finally up, and the indebted families, corporations or nations can no longer even afford the interest payments, the debt burden will be passed to the unsuspecting taxpayer by way of inflation.

Since the inception of the Fed, the game has been managed very well. Smaller banks were allowed to fail, just as they are now. This gives the appearance of “letting the market work.”

Let’s look at some of the worst of the big bailouts, just so you can see get a grasp of what has happened, what will happen and how that affects your money.

SAVING BAD BUSINESSES BY STEALING YOUR MONEY 

Penn Central was the nations’ leading railroad prior to 1970. And it was a pretty egregious example of how far bankers were willing to go to bilk money out of a cash cow.

Penn starting getting deeply into debt. Its loans were rolled over, and more money was forwarded to keep operations going, which included servicing interest on their current debt. But as things got worse, the huge banks who were in on the play, which included Continental Illinois, Chase Manhattan, Chemical Bank, Manufacturer’s Hanover and First National City, agreed to continue the loans only if the banks’ officers were put on the railroad’s operating board.

So essentially, the bankers lent themselves money and were in cahoots with the whole game. Also, they were privy to information about the railroad and its stock far ahead of the public. They used this information for their own private profit as the railroad bit the dust. Public records showed that the top executives saved themselves more than $1 million dollars by the sale of stock ahead of the public. A million saved is a million earned.

After all the banks who were called in to support the railroad with cash funds were given complete assurance that the Fed would guarantee the loans, the bailout was a done deal. Immediately all the unionized employees of the failing enterprise were given 13.5% raises. In the end, the Fed authorized loan guarantees of $125 million.

This was never really intended to solve the problem, and a year later the railroad was nationalized and its passenger service became Amtrak. It is a government-run enterprise to this day and continues to operate at a massive loss… only staying open with further governmental subsidies.

The freight side of Penn Central became Conrail, with the government owning 85% of its stock. Fortunately it was sold in a public offering in 1987, staged an impressive comeback and operates at a profit.

At the same time, defense giant Lockheed was also on the edge of bankruptcy. It was $400 million in debt, and Bank of America, along with several other smaller banks, were anxious to keep the milk flowing. Eventually, they marshaled an army of interested parties and went to Washington. They claimed that tens of thousands of jobs would be lost, along with suppliers and subcontractors who would be forced into bankruptcy if Lockheed were allowed to fail. So the government gave them an additional $250 billion in guarantees. That increased their total indebtedness 60%.

Of course, the government had a not-so-secret desire to see Lockheed pay off these debts, and the only way it could do that would be to earn more money. So the company became the chief winner of no-bid contracts and recipients of other governmental work. In the meantime, other defense contractors suffered, since they were essentially pushed out of the whole process in the rush to save Lockheed.

In the mid-’70s, New York City was pursuing the same path. Waste and overspending abounded in this gigantic welfare experiment. By 1975, NYC had sold so many bonds, the market was flooded with them, and there were no more lenders. Well, almost no more. Chase Manhattan and Citicorp were the banks that were benefiting the most from interest paid on these debt, but when the day finally came that interest payments were halted, both bankers and city leaders put together a caravan to Washington, D.C.

Same game plan: Threats of halting essential services… no firemen… no police… no garbage pickup. Rioting and anarchy in the streets. Spreading disease. In New York City? This could have international repercussions.

Out came the federal checkbook and draft was made for $2.3 billion, double what the city already owed. Even though there were a number of conditions placed upon the loan to balance the NYC budget and get a surplus to pay off these debts, none of them were ever honored. The city remains in debt to this day.

Then there was Chrysler for $1.5 billion.

Unity Bank, which eventually cost taxpayers just under $4.5 million.

Commonwealth Bank of Detroit, which enjoyed a $1.5 billion fed bailout — then was eventually sold to First Arabian Corporation, a firm funded by Saudi princes.

First Pennsylvania Bank was carrying $328 million in questionable loans, $16 million more than the entire stock float of the company. They received a $325 million loan from the FDIC.

Continental Illinois was the nations’ seventh-largest bank. It had assets of $42 billion, thousands of employees around the globe and an annual income of $254 million by 1981. Unfortunately, its stellar growth was based on shaky loans to risky businesses and foreign governments who could not obtain financing anywhere else.

Its stock was doing wonderfully, and it was named one of the five best-managed banks in the country. But as they began to reap the risk they had sown, the worlds’ first electronic bank run began. Customers were blissfully unaware, but the biggest depositors began withdrawing their funds, and the business was rumored to be in trouble. Creditors raised their interest rates to the banks and began withdrawing funds. In just four days, Continental’s withdrawals were so heavy, they were forced to go to the Fed for a $3.6 billion loan to cover them. Several banks extended a 30-day line of credit, but it was of no use. Within a week, the bank’s outflow ballooned to over $6 billion.

In the end, Continental’s liabilities (including those off-book) totaled $69 billion. Only about $3 billion of that was FDIC insured. The final bailout was more complicated than I can go into here. But just know that the bank was bailed out, and the taxpayers were stuck with the bill.

Then comes the subprime fiasco of 2008. Notice the fact beyond debate, that the Fed did not come to the rescue of the subprime borrowers. Nope — it rescued the banks. It was for this purpose that it was designed, and it continues in its mission today.

All in the name of preventing catastrophe, protecting the public and providing “liquidity” to the markets.

The multibillion-dollar bailout engineered last year is only chump change to what it will eventually cost the taxpayer. Protect the banks — fleece the public.

So what does all this have to do with us and options? Allow me to bring it home…

THE FED DOESN’T EXIST TO HELP YOU

The key point here is that central banks do not exist for the good of economies. They do not exist for the good of citizens. Their sole purpose is to keep the game going, and to profit from it as long as possible. After that, they clear out, leaving the taxpayers to pay off their debts. Their protection and enhancement of economies and citizens is just a means to end. As long as it helps the profits roll in, helping others is fine. But in the end, they will foist responsibility to others.

So we have to expect central banks to do whatever will profit the most and keep the game going. But, of course, in the end, you reap what you sow. It’s true for all men, including central bankers.

The fact that 98% believe that Ben Bernanke should be re-appointed to his post is evidence of the widespread misunderstanding of what he and his predecessors have done.

Regards,
Bill Jenkins

August 17, 2009

The Fed is Stealing Your Money was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Today I have something new for you that I heard over the weekend. It may not be news to everyone, but its implications could be staggering.

As a father of seven whose children are all grown, I look to get frequent doses of youth from my grandchildren. They are a perpetual delight! This week’s insight comes to us courtesy of my grandson, Jack.

It started when my son-in-law, John (Jack’s Dad), celebrated a birthday recently. One of his gifts was a greatly needed new wallet.

In the spirit of kind giving, John passed his old wallet down to his son Jack.

“Here, Jack,” he said. “You can be like daddy and use this to put your allowance in and keep it safe.” He slipped his $1 allowance into the billfold. (I’ll let you guess Jack’s age based on the size of his allowance!)

Jack smiled warmly as he thanked his dad for his new present. He then proceeded to throw the dollar bill on the floor (where he left it in worthless shame) and began stuffing his new wallet with his sizeable Pokemon card collection. “This will be just right for holding all my cards!” he exclaimed.

There you have it. In the eyes of the next generation, the Almighty USD shall be replaced with the Japanese Pokemon currency. (And I’ll bet you thought it was going to be something Chinese!)

OK, maybe not Pokemon cards… but the story does represent what is happening to the dollar in a childlike way.  Jack may not know yet the “value of a dollar” (a phrase likely to perish as meaningless in years to come), but he does realize that there are things of value in his community… his community being the other little boys in his school class.

The fact of the matter is this: the USD is the world’s reserve currency by default. It is simply so by the function which it currently serves. It was not made the “World’s Reserve Currency” by some multinational edict out of the G-8, G-20, UN or IMF.

Nor do they have the ability to do so in the future. They may make such statements, and they may indeed produce a currency, but that does not guarantee its place as the premier money of the world.

Such statements are like a prisoner who is locked away for life saying, “I think I will choose to stay in jail.” He’s made a decision. He’s made his decision known. He acts on his decision. But it doesn’t change anything.

In the end, a currency only works if it is a real store of value.

Let’s say Jack takes his new wallet full of Pokemon treasure into school. But as a good capitalist, he also takes his allowance. Assuming the boys in his class also share the same mentality, how many of his friends’ cards can he buy for a buck? Zero.

In their “community,” cards are more valuable than cash. He is only going to get a coveted card from a friend, if he can offer him something that the friend perceives is of greater value. Perhaps a single card, or a whole slew of them together.

Such is the essence of the barter system, or any new currency system. If it is not a store of value, then you might as well try buying something with dirt!

At any rate, I hope I don’t live long enough to see the day that Pokemon becomes the new currency. If it does, Jack may have to take over the weekly wrap-up to explain the difference between a Pikachu and a Jigglypuff (who comes up with these names?).

Regards,
Bill Jenkins

July 28, 2009

Pokemon Currency Trumps Dollar was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.