“A state that does not claim the ability to heal, the legal right to heal, and the moral responsibility to heal is a night-watchman state. It does not make comprehensive claims for delivering men, so it does not make comprehensive claims on the allegiance of men. It is limited government, precisely because it acknowledges that it cannot heal.”

Ah, the limited government. As durable as the morning dew. Or the snowball in Hell.
We don’t think that the state can ever limit itself to nightwatchman. Not for long. It’s like the butterfly limiting itself to the caterpillar stage. All states must move toward their final form, growing as large, intrusive and destructive as they possibly can given the surrounding conditions of zeitgeist and economy.

So the state that started out as the freest the world had ever seen wound up using the riches generated by its (initially) laissez faire economy to become the world’s largest aggressor. Full of the most rampant fascist corporatism. The most military spending, the biggest army and greatest number of foreign entanglements. The one seeking to monitor every single thing its subjects do anywhere and at any time.

“Just return the government to the one proscribed by the Constitution!” you might say. But the Constitution itself was a power grab by the elites of the day. A “compromise” between the desires of the monarchy-minded Alexander Hamilton types and the existing Articles of Confederation…which themselves did a much better job of limiting how much central government there could be in these United States.

If you doubt this thesis, just take a look at the reality. Ask yourself how well the Constitution has protected liberty and limited government. Not that the Articles would have worked all that much better or for that much longer (though they might have).

Like any virus worth its capsomeres, the state will find a toehold wherever said toehold may be and then evolve to fit prevailing conditions.

And when conditions are right — when the host is rich and plump from laissez faire but still drunk with jingoism and the mythology of the “good, night watchman” government — then watch out. For such conditions will give you the monstrosity that is Washington, D.C., with its globe-spanning armies…its armada of flying robots that can spy or kill without ever being seen by their targets…its data centers through which every utterance, every whisper in the world will one day flow…

The nightwatchman state always harbors grand ambitions in its heart. It may promise to limit its roll to keeping you and your house safe as you sleep. But it dreams of barging into your home and carting you off to prison and taking your property as its own.

The State Can’t Stop At Night Watchman was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Housing is probably going down. Remember, Mr. Market has to destroy the idea that “housing always goes up.” When he’s finished people will think that “housing never goes up.”

Unemployment? People are gradually beginning to realize that the last ten years were the worst for creating new jobs in America’s history. If they keep thinking about it they will realize that it is not just the bust that is destroying jobs; there was something very wrong with the boom too.

Meanwhile, the markets are still calculating, figuring, deciding what things are worth. In the last couple of days, they’ve been thinking that maybe stocks and gold got a little too uppity.

From all we can tell, the Great Correction continues. And here’s a report from The New York Times that tells us where it leads:

OSAKA, Japan – Like many members of Japan’s middle class, Masato Y. enjoyed a level of affluence two decades ago that was the envy of the world. Masato, a small-business owner, bought a $500,000 condominium, vacationed in Hawaii and drove a late-model Mercedes.

But his living standards slowly crumbled along with Japan’s overall economy. First, he was forced to reduce trips abroad and then eliminate them. Then he traded the Mercedes for a cheaper domestic model. Last year, he sold his condo – for a third of what he paid for it, and for less than what he still owed on the mortgage he took out 17 years ago.

“Japan used to be so flashy and upbeat, but now everyone must live in a dark and subdued way,” said Masato, 49, who asked that his full name not be used because he still cannot repay the $110,000 that he owes on the mortgage.

…For nearly a generation now, [Japan] has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.

“The US, the UK, Spain, Ireland, they all are going through what Japan went through a decade or so ago,” said Richard Koo, chief economist at Nomura Securities who recently wrote a book about Japan’s lessons for the world. “Millions of individuals and companies see their balance sheets going underwater, so they are using their cash to pay down debt instead of borrowing and spending.”

Regards,
Bill Bonner
Whiskey & Gunpowder

October 27, 2010

Slow Growth or Contraction was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

More than 500,000 readers of the company’s free Daily E-letter were asked a single question: Are you more open to moving outside the United States than you were 12 months ago?

A stunning 95.6% of those who responded said they were now more willing to make the move and leave the U.S.

“We suspected from record attendance at our global conferences this year that something big was happening to attitudes in the U.S.,” said Jackie Flynn, publisher of InternationalLiving.com.

“The economy is faltering,” said Flynn, “unemployment is at record levels, the health care debate nearly caused a civil war, and there are real wars being fought on two fronts in the Middle East. The cost of living is going up so fast that people are being priced out of their retirements. It’s no wonder our readers are getting serious about moving abroad.”

One such reader is Elaine Yakos-LeBron, an advertising executive in her early 60s from Washington D.C.

“I attended an InternationalLiving.com conference several years ago, after my husband died,” said Yakos, “but when I got back to the States, with the economy down the tubes, I was lucky to keep my job and not be laid off. I dropped anything to do with moving or buying abroad. I just focused on work.”

But then, Yakos said, she decided to attend the InternationalLiving.com Ultimate Event V, held this past February in Quito, Ecuador.

“After losing over a third of my money in the market,” she said, “I’d had enough. I told my financial advisor that he should be ashamed of himself for making more on my money than I was.”

Yakos was impressed with what she learned at the InternationalLiving.com conference. She also realized she wasn’t alone in looking for options outside the U.S. Nearly 400 people, mostly Americans, were there with her.

Along with attending the conference, Yakos spent some time touring Ecuador. It wasn’t lost on her as she was driving along Ecuador’s sunny Pacific coast that there was four feet of snow on the ground back home.

“I don’t have deep pockets, and I’ve been hit by the downturn like everybody else,” said Yakos. “But I’ve always wanted to live where the weather is great and I can hear and see the surf. I learned that I can do that in a place like Ecuador because it’s so affordable.

“After the conference I went to Manta and made a deposit on a condo overlooking the water. I’m a little nervous, but I’m also excited. I now have a lovely place to vacation, and when I do get ready to retire, I’ll have the life I want.”

Elaine Finnegan, InternationalLiving.com events director, said Yakos’ story isn’t unique, and that record attendance at global conferences and seminars so far in 2010 bears out the survey results.

“At our Ultimate Event in Ecuador last February we had the largest crowd for any event in our 30-year history,” said Finnegan. “Nearly 400 people just like Elaine Yakos-LeBron flew all the way to Quito for a four-day conference about living and investing abroad. That’s unprecedented, yet it seems to be continuing.

“We’ve already broken last year’s attendance record for our Live & Invest in Panama event coming up April 18-20,” said Finnegan. “For the first time, we’ve actually had to cap registrations. Our International Real Estate Investment Forum in Toronto June 3-5 is already half full, and we haven’t even started advertising it yet.

“There seems to be a groundswell of discontent in the U.S.,” said Finnegan, “and we’re seeing a record number of people who are ready to vote with their feet and get out while they can still afford to do so.”

Regards,
Dan Prescher
Whiskey & Gunpowder

April 12, 2010

Record Number of Americans Ready to Expatriate was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

And counter to our prediction of an imminent, counter-trend U.S. dollar rally, the dollar is most definitely not surging. Take a look at the chart below. We’ve been writing about the decline of the dollar for nigh on ten years. So we looked at a ten-year chart to tally up the damage. It is considerable.

Dollar Index Threatens New Lows

What’s at stake with the interpretation of this chart? If the dollar rallies on short covering from the dollar carry trade (a BIG if), then other “risk” assets like gold, stocks, and emerging markets would probably sell off.

The chart shows that the index’s 50-week moving average is set to cross below its 200-week moving average. That is mixed news. The first time it happened on this chart was back in early 2003. That was the early days of a long decline in the index. The second time, though the move failed to confirm the “flight to safety” rally of 2008 had staying power in 2009.

Once the fear that gripped markets in 2008 went away, the investment world sold the dollar and started borrowing en masse to buy other, higher-yielding currencies and assets (like the Aussie dollar and resource stocks). That’s where we are now.

But based on the chart, is the next move down in the dollar index a new low, which the crossing of the long-term MA by the short-term MA would suggest? Or is it a false move? Will the dollar quickly and violently rally for some reason (geopolitical perhaps) that currently remains unknown to the human beings of this world?

“It’s an interesting chart,” said our technical analyst Murray Dawes. “But it is not useful for timing your moves out of or into trades related to the dollar’s movement.”

“So you’re saying our chart doesn’t have any useful information from a trader’s perspective?”

“Not really.”

The one piece of important information communicated by our chart is that the dollar’s trend is down. But there IS a catch.

The catch is that when this many people are this uniformly bearish, everyone is probably wrong. Consider this a warning then, that a dollar rally is just the sort of thing that will lead to a correction in the gold price and the stock market. We won’t speculate on the sort of things that could lead to a dollar rally. But surely they’re out there and sooner or later they’ll come.

The other possibility is that the dollar is in its death throes and that this is the big one, in currency terms. That is such a momentous and disastrous event that people consider it both kooky and unlikely, not to mention undesirable to a predictable and comfortable world. But it IS possible.

And do you get the feeling that this kind of manic melt up rally is the sort of irrational frenzy that comes just before everything goes haywire? Haywire is not a precise financial term. So what do we mean?

We meant that the world enjoyed a 20-year economic relationship based on a fundamentally unbalanced global economy. Manufacturing capacity migrated to Asia where wages were lower. For awhile, this was mostly good news in Western countries. Goods got cheaper but jobs didn’t vanish.

Now the situation is not so pleasant. The world is awash in manufacturing over-capacity, especially in China. Wage deflation (in the Western world) looks like a long-term trend, leading to a lower standard of living. This wage deflation is occurring at exactly the same time that Western governments are encountering demographic crises of ageing populations.

We all knew the ageing of the Boomers would put pressure on public finances right around now. But no one reckoned on a global financial crisis further saddling the public balance sheet with debt. And no one reckoned that Western wages and incomes would be falling at just the time people needed them most. And no one reckoned that savers would lose the most from low interest rates on fixed income — even though those low rates are keeping the American housing sector on life support.

It’s a bit of global impasse. America’s needed structural adjustment has come. Households and businesses are reducing debt, trying to live within their means. But the net adjustment to the American balance sheet is not happening because public sector debt is growing so fast.

Meanwhile, the other obvious adjustment is that the Chinese currency ought to be allowed to strengthen. For political and social reasons though, China will not allow this. It means China is actually adding to its industrial over capacity. It is conjuring up the world’s largest ever bubble in fixed asset investment, including commercial real estate.

It is easy to see why China is reluctant to allow a stronger Yuan. Exports account for 39% of Chinese GDP. The Chinese economy, and probably the Communist Party itself, cannot survive on unleashed Chinese domestic demand. They need American markets. But American consumers — in addition to reducing debt — are now realising that the focus on finance over manufacturing from American policy makers has worked out for Washington and Wall Street, but not terribly well for the average American worker.

Where do we go from here? How about the blame game. U.S. Treasury Secretary Tim Geithner once blamed the Chinese for being currency manipulators. He back-tracked later. And yesterday, Liu Mingkang, the chairman of the China Banking Regulatory Commission, had a go at America.

“The continuous depreciation in the dollar, and the US government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation.” He is blaming the U.S. for fuelling a destabilising global bubble.

Of course that bubble is felt most acutely because China pegs its currency to the dollar. China is right to blame the U.S. for manipulating its currency to try and improve its competitive position. And China is right to worry about the value of its dollar-denominated assets in a world of exploding U.S. debt supply.

But China has put itself in this position. And here we are at the end of 2009 with a world still fundamentally un-adjusted to a new, workable currency arrangement. The world remains burdened by trillions in assets purchased with debt. Those assets linger on bank balance sheets, on government life support but fundamentally lifeless at fictitious book value prices.

And meanwhile, the China-US currency arrangement has fuelled a global bubble. The question is how it will end. In the U.S., the housing market looms as the Achilles heel of the economy. It could strike households, banks, and the government again in the next 12 months are more mortgages reset at higher rates (with lower home values).

If the event that pops this bubble comes from America, look for the supply of credit to the emerging world to dry up again. If the bubble pricking comes from China, what then? Well, China does everything big. So a Chinese bust would be world-class.

Regards,
Dan Denning

November 18, 2009

Editor’s Note: This article originally appeared in the Daily Reckoning Australia as “Dollar Rally the Sort of Thing that Will Lead to Correction in Gold Price.” To view the original article, please click here.

Will a Dollar Rally Lead to a Gold Correction? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward — all in a desperate bid to make Americans feel better about the global financial crisis.

To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”

But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.

Yet that hasn’t quite happened.

Core inflation — which denotes consumer prices without food and energy costs — has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.

So what gives?

Well, there are four reasons we haven’t yet seen hyperinflation:

Banks are hoarding cash. Despite having received trillions of dollars in taxpayer funded bailouts and lived through a litany of shotgun weddings designed to reinvigorate the shattered lending markets, most banks are actually hoarding cash. So instead of lending money to consumers and businesses like they’re supposed to, banks have used taxpayer dollars to boost their reserves by nearly 20-fold according to the Federal Reserve. The money the bailout was supposed to make available to the system is actually not passing “Go,” but rather getting stopped by the very institutions that are supposed to be lending it out. Three-year average annualized loan growth rates were 9.6% before the crisis; now they are shrinking by 1.8%, according to Money Magazine.

The United States exports inflation to China, which remains only too happy to continue to absorb it. What this means is that low priced products from China help keep prices down here. And this is critical to something that many in the “China-is-manipulating-their-currency” crowd fail to grasp. If China were to un-peg the yuan and let it rise by the 60% or more it’s supposedly undervalued by, we’d see jump in prices here in everything from jeans to tennis shoes, toys, medical equipment, medicines, and anything else we import in bulk from China. Chances are, the shift would not be dollar-for-dollar or even dollar-for-yuan, but there’s no doubt it would be significant. Many economists I’ve talked to privately think 25%-35% is probable. So the next time you hear a “Buy American” extremist, you might want to share this little inconvenient truth.

Consumers are still cutting back. Therefore, the spending that normally helps pull demand through the system is simply not there. I don’t how things are in your neighborhood, but where I live, people are still cutting back. Indeed, data from the U.S. Department of Commerce and the Federal Reserve Board shows that consumer spending growth averaged 1.4% a year prior to the crisis and is now shrinking at a rate of 0.7%. What this means is that people have figured out that it’s more important to save money than it is to spend it. And, given that consumer spending makes up 70% or more of the U.S. economy, this is a monumental change in behavior that all but banishes the last vestiges of the “greed is good” philosophy espoused by Michael Douglas as Wall Street pirate Gordon Gekko in 1987.

Businesses continue to cut back rather than hire new workers. Therefore, wages and wage inflation figures are lower than they would be if the economy was truly healthy and the stimulus was working. This is especially tough to stomach because it means people are still being marginalized, laid off and “part-timed” instead of being hired. And that means that most of the earnings growth we’ve seen this season has come from expense reductions rather than top line sales growth — and those are two very different things. But while this is tough, it’s also helped keep inflation lower than it would otherwise be. Prior to the financial meltdown, job growth averaged about 1% a year over the last three years whereas now it’s falling by 4.2%.

The upshot?

Any one of these factors could change at any time. And that means investors who are relying on the Fed’s version that everything is okay and that the government is managing inflation may be in for a rude awakening.

The only thing the Fed is doing is managing to manipulate is the data, and even then, not very well.

Regards,
Keith Fitz-Gerald

November 16, 2009

P.S.: For the last several years I’ve made my insights about the Asian markets and the true nature of the global capital markets available to investors via my daily columns in Money Morning and its monthly affiliate, The Money Map Report. Now I’m making those insights available through my new book, “Fiscal Hangover: How to Profit from the New Global Economy,” which can be purchased here.

Editor’s Note: This article originally appeared in Money Morning as “Four Reason Hyperinflation Hasn’t Hit the U.S. Economy Yet.” To view the original article, please click here.

Four Reasons Hyperinflation Hasn’t Hit the U.S. Economy Yet was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Our views are different, but not extraterrestrial. Once upon a time, not so long ago, they were even respectable. The gist of our message two weeks ago was that debt is dangerous. It feels good at first. But give a society too much debt – either in its private sector or the public sphere – and someone’s going to get killed. That’s why the present situation is such a delight to serious economists; it offers more data points. We get to see how much straw the feds can add before the poor camel’s back breaks.

What’s the best way to get through a debt crisis? Straight through was our advice last week. For at least a thousand years, the business cycle went round and round without help from central bankers or economists. It is only since these geniuses have been on the case that really serious problems have arisen. The Panic of 1920 – in which the US government did nothing but cut taxes and spending – was quickly forgotten. The Panic of 1929, on the other hand, was followed by massive rigging and jiving by the authorities. It took 20 years and a world war to overcome; today it is still remembered today as the Great Depression.

Martin Wolf, speaking, gravely, for the world’s intelligentsia in The Financial Times last week, proclaimed that: “the only thing worse than rescuing the system would have been not rescuing it.” But he is wrong; of all the many blessings economists may bestow upon a grateful people, improving the economy is not one of them. An economy is a natural thing. It can be improved by the striving of entrepreneurs, the prudence of bankers, and the sweating of field hands. But when it comes to the macro-economic policy, forbearance is the quality that pays. Any initiative on the feds’ part inevitably makes things worse.

The Bubble Era, like the Great Depression, was largely -but not completely – the result of government initiative. Artificially low interest rates – intended to counter the modest downturn of 2001 – sent the wrong message. Consumers – notably those in Britain and America – bought things they couldn’t afford. Producers – notably those in Asia – made things for which there was no real market. Debt piled up. Mountains of it.

As consumers bought more and producers made more the economy grew. But much of the economic “growth” of the 2001-2007 period was fraudulent. It was based on debt spending, not on genuine increases in purchasing power. Debt pretends to be real money. It looks like the real thing, but it is not. It stimulates the economy like counterfeit money. It causes production and consumption, but of the wrong sort. Former Reagan era Office of Management and Budget director David Stockman estimates the level of “counterfeit GDP” at $4 trillion in the US alone.

The fraud was discovered, though misunderstood, when sub-prime debt began to implode. The economy had been kissed hard; millions of houses had been built, bought and sold. Now, owners couldn’t pay for them. All of sudden, the counterfeit money began to shrivel up. Lenders, investors, and householders all began to de-leverage; paying down the debts as fast as they could, defaulting on those they couldn’t.

Rather than come to the obvious conclusion, that they should never have meddled with the economy in the first place, the feds began rescue operations on a breathtaking scale. The British government increased spending to 140% of revenues. America now runs a stimulus program nearly equivalent, in economic impact, to WWII. Not since 1945 have the two pages of its ledgers – debits and credits – told such different stories, with almost $2 of spending for ever $1 in tax receipts. Britain will add almost 50% to its government debt in the next three years. David Stockman expects the publicly held US national debt to almost double in the next five years.

Even at those levels, many economists think the government should do more. Nobel Prize winner, Paul Krugman is one. Richard Koo is another. They’ve warned that the US (and by extension much of the rest of the world) could suffer a Lost Decade, like Japan, if the government slacks off before consumers have finished de-leveraging. At least they understand what is going on. Too bad they missed the point of it. The problem is too much debt, not too little spending. Leveraging up the public sector doesn’t help. Even government debts must be paid – if not by the borrower, then by the lender. The feds are smooching more ardently than any debt lover in history; next, we get to see who dies…or at least who defaults.

Regards,
Bill Bonner

November 4, 2009

Editor’s Note: The above article originally appeared in The Daily Reckoning as “The Kiss of Debt.”

Debt Is Dangerous, Especially of the Government Kind was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The forward P/E multiple on the broad stock market is not nearly as high as it was during the Internet bubble, but it’s at extreme highs if one accurately diagnoses the unsustainable stimuli currently driving global economic activity.

Just like low-quality earnings paint a misleading picture of a company’s value, this low-quality economic activity destroys wealth and promotes a dependence on sustained fiscal largesse.

Such a diagnosis would filter out how fiscal and monetary policies are distorting the efficient allocation of capital. Investors should interpret government spending as noise and interpret private sector behavior as the signal. In today’s state-sponsored economy, you cannot totally separate one from the other, but it’s still important to acknowledge the distorting influence that stimulus programs have on capital spending and hiring decisions.

What happens when the stimulus wears off? Why, we have even more excess capacity in sectors where stimulus was directed. Exhibit A: cash for clunkers. Exhibit B: the tax credit for homebuyers that will exacerbate the structural glut in housing supply. In the financial media, I’ve seen investor after investor defend these programs as valuable and necessary, which demonstrates their ignorance of sound economics.

We’re propping up zombie institutions, throwing good money after bad, and rewarding incompetence — all at the expense of prudent people’s savings and the capital that will be needed to fund the industries of the future. Top investors don’t tolerate low- or negative-return-on-capital decisions by the executives running their companies, so it’s puzzling to me why so many of these investors advocate the same type of economic malpractice on the part of government policymakers.

The latest sideshow for public consumption — a “paymaster” regulating pay at large banks — is another example of the government’s misdiagnosis of the problem.

Rather than regulate pay in the hopes that it discourages risky banking behavior, we should be phasing out the government guarantees of the banking system’s liabilities. That, I assure you, would discourage foolish risk-taking among bankers. Case in point: Goldman Sachs behaved in a much more responsible, sustainable manner when it was a privately owned partnership without government guarantees, rather than the high frequency trading, TLGP-hogging, heavily lobbying institution that it is today.

Like an addictive drug, today’s fiscal and monetary policies have made everyone feel better, but have further weakened the structural health and sustainability of the economy. If you doubt this, just look at the horror in most investors’ eyes when they are confronted with the prospect of a Fed Funds rate above, say, 2% — up from today’s range of zero percent. The addiction to E-Z credit and government support everywhere you look is one of the clearest reasons that this economic recovery is an elaborate illusion.

Yet we still see examples of extreme inefficiencies in the valuation of certain stocks. It feels eerily similar to the tech bubble, with investors behaving as if today is the last chance they’ll ever get to buy Amazon.com stock at less than 80 times earnings.

Whether it’s the sky-high multiple on Amazon’s maturing business, which seems to be discounting that every Chinese citizen will own a Kindle within 5 years, or the expectation that banks employing creative accounting have seen the worst of their credit losses, many investors are putting real money behind their belief in a super-bullish economic environment.

The reasons to be cautious and bearish are overwhelming. A market correction back to more normalized valuations may happen at any point.

Lastly, I attended the Value Investing Congress in New York last week, along with Addison Wiggin and Chris Mayer.

The most important takeaway for me was the audience’s apparent skepticism towards the two most bearish presenters: David Einhorn and Eric Sprott. Both hedge fund managers are bullish on gold and critical of Washington, D.C.’s wealth-diluting fiscal and monetary policies. The tone of the Q&A sessions after these presentations tells me that most investors are still very, very skeptical of investing in gold. That’s good news for gold bulls.

It’s also good news for stock market bears that so many believe in the Keynesian theories they read in their college economics textbooks. GDP growth driven by government spending is misleading, and damaging to capital formation. Much of today’s top line growth is coming at the expense of future profits — when mal-investments will be written off.

Regards,
Dan Amoss

October 28, 2009

Economic Misdiagnosis Due to Government Stimulus was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

A short series of secret memos, published and dissected at ZeroHedge, provide the “smoking gun” of gold-market manipulation. Apparently.

And given this little slew of dusty archive-digging – throwing up three documents from 1968 to 1975, each one declassified within thirty years – then “If over 40 years ago the Fed and the members of the gold ‘Pool’ were openly intervening in the gold market, one can only imagine what the situation is now…”

Go on, just imagine. Because imagination is what you’ll need if you’re going to nail type-written notes from before the Moon Landings as primary, original-source evidence that the United States’ official gold reserves – variously sold, lent, swapped or simply given away since the early 1990s – have been mobilized to suppress prices, pushing gold down from $250 an ounce a decade ago to, ummm, more than $1000 today.

These memos fret about shrinking gold reserves and the world’s gold-driven money supply…Britain’s failed deflation policy of the late ’60s…whether South Africa will sell its new mine supply on the open market…German border taxes…and the “gold-like” qualities of the proposed Special Drawing Right (SDR). Such prehistory matters, yes. But it’s a world away from demonstrating what newcomers to gold today may mistake for good cause to steer clear.

The little history these scattered notes sketch does echo today, however faintly. Are central banks buying gold at market prices – then France, now Beijing through via its domestic gold output? How to replace the abiding monetary standard – then gold, now the Dollar? And like the Fed memos reviewed on blogs elsewhere this year, the notes republished by ZeroHedge certainly prove one thing, at least:

Just how awkward gold became long before the collapse of the Bretton Woods monetary system. Bluntly put, it was a pain in the arse – and not only for Washington.

“Gold was causing such a rumpus that most authorities wished it would go away and stop bothering them,” as the late Peter Bernstein wrote in his 2000 history, The Power of Gold. But with so much of the world’s gold stacked up in their vaults, slipping away was impossible, and the world’s monetary system instead “lurched from crisis to crisis” says Francis J.Gavin, University of Texas at Austin’s professor of international affairs, in his 2004 monograph, Gold, Dollars and Power.

“There was not one year between 1958 and 1971,” Gavin finds, “when the Dollar and gold problem was not the most pressing issue of American foreign economic policy.” Or as President Kennedy put it in August 1962, “My God, this is the time…

“If everybody wants gold, we’re all going to be ruined.”

Luckily for JFK and the Dollar, not everyone wanted gold. Like Washington, the British government would have quite happily seen its former “badge of honor” turned to dust and swept away, too. Their private citizens were barred from owning gold, with strict controls applied across most of the rest of the developed (and communist) world. Yet with so many new US Dollars flooding the world…and with the Dollar-exchange clause of the 1944 Bretton Woods treaty still in force…less pliant friends increasingly asked for, and got, gold over dollars.

One nation actively sought to bring on the crisis. “There can be no other criterion, no other standard, than gold,” announced French president Charles de Gaulle at a press conference on February 4, 1965 – “gold that never changes, that can be shaped into ingots, bars, coins…that has no nationality and that is eternally and universally accepted as the ultimate fiduciary value par excellence.”

De Gaulle spoke in French, naturellement, in the gilded Salle des Fêtes of the Elysées Palace. But the White House’s least Francophone staffers could get the message loud and clear when, six days later, de Gaulle’s finance minister – future French president Giscard d’Estaing – announced in a lecture at the University of Paris that, from now on, France would swap every new Dollar it accumulated for gold bullion from the Federal Reserve.

The major powers, he said, should “make a solemn and unequivocal declaration” to likewise settle all their international payments in gold. Which was an easy thing for France to declare, given its large balance-of-trade surplus.

To drive the point home, France then made headlines around the world by announcing it would not only swap all new Dollars for gold…but immediately ship that new gold straight to France, too.

What could the United States do? As we’ve noted time and again, the final collapse of the Gold-Exchange Standard – put out of its misery in Aug. 1971, when Richard Nixon canceled America’s gold-for-dollars obligation – came because the US government wanted to keep hold of its gold. The legerdemain of then “demonetizing” it through occasional sales and amendments to the IMF treaty only hid this plain fact; it didn’t deny it.

The international promise signed after the Second World War made defending that hoard impossible given America’s domestic Dollar-inflation. Producing more dollars than the rest-of-the-world needed to finance its trade, the United States also invited a drop in the Dollar. That in turn invited withdrawals of gold from its vaults, effectively sparking a “run on the United States” as one advisor called it in the mid-60s’ phase of the crisis.

“The kind of transcending value attributed to the Dollar,” Charles de Gaulle had said at that 1965 press conference “has lost its initial foundation, which was possession by America of the greater part of the world’s gold.” Never mind that de Gaulle himself knocked out that support. What mattered was the abiding idea – gold equals power. Thus US dominance was clearly ebbing away.

“The French this year have been cashing in dollars for gold at a $54 million-a-month rate,” reported Time magazine in mid-1966. “Last week the Bank of France reported that as of Aug. 1, France had hoarded $5.13 billion in gold. Gold now constitutes 86% of all French reserves, compared with 73% at the end of 1964.

“Moreover, the [French] government is squirreling away the precious metal at such a rate as to account for the entire net US gold drain so far this year.” Hence de Gaulle’s jibe at the Dollar’s fall became self-compounding. By demanding gold over dollars, he proved the value of metal, not paper. But only on the old tattered Gold Standard logic. Losing its dominance as the gold-hoarder par excellence, the United States still retained the supreme currency. The “exorbitant privilege” of which de Gaulle’s advisor, Jacques Rueff, had complained, would now take America’s economic power as its foundation. Depriving the US of its bullion backing, the promise to redeem Dollars for gold was replaced with the promise to redeem Dollars with interest.

Fast forward to the fall of 2009, and the United States remains the world No.1 holder of physical gold (the potential for secret sales, swaps, loans and outright gifts to Wall Street notwithstanding), but while France and the rest of Europe turned seller, Russia and emerging Asia began re-stocking this decade. Moreover, “The United States would be mistaken to take for granted the Dollar’s place as the world’s predominant reserve currency,” as World Bank president Robert Zoellick told an audience at Johns Hopkins University in Washington this week.

“Looking forward, there will increasingly be other options to the Dollar…The future for the United States will depend on whether and how it will address large deficits, recover without inflation that could undermine its credit and currency, and overhaul its financial system.”

Zoellick naturally mentioned the Chinese Yuan, noting that “Over 10 to 20 years [it] will evolve into a force in financial markets.” He just happened to speak on the very same day, as Reuters observes, that Beijing issued its first Yuan-denominated bond open to foreign investors. Yet all the World Bank chief did, however, was confirm today’s abiding idea – that monetary power builds on an economy’s strength.

Maybe a new or even old idea will emerge in the next two decades or so. “The manner in which [this crisis] is resolved may well determine the shape of the world’s monetary arrangements, and therefore our economic and political interests over the next generation,” as then-Fed chief Arthur Burns memo’ed President Ford in June 1975, but the problem of excess Dollars was never quite fixed.

Still, we guess it’s more than coincidence Beijing is now buying gold – as well as frantically powering its non-stop economy – as the world’s monetary standard slides into crisis mode.

Regards,
Adrian Ash
BullionVault

October 2, 2009

Gold, the Dollar and Smoking Guns was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Despite what a few elderly Mr. Naturals may say about abolishing “capitalism,” we’re not going to have an advanced economy without a coherent banking system, and by advanced economy I mean one in which the lights stay on. By coherent I mean a system that is able to deploy accumulated wealth for productive purposes, in the service of continuing civilization. (And, yes, I know that the followers of Daniel Quinn are not so sure that civilization is worth the trouble, but unless you support the killing-off of about six billion humans right away, things on Earth are not favorably disposed just now for a return to hunting-and-gathering.)

I would hasten to cut through the fog of despair to reassert — for the thousandth time — that a true American perestroika is possible, if the public could overcome the plague of cognitive dissonance sweeping the land and form a consensus for action that comports with reality’s agenda. But that is looking less and less likely. Instead, what we see is a rush into delusion, seasoned with grievance and gall. Spectacles like last weekend’s march on Washington don’t happen for no reason, of course. From where I sit, the uproar can be attributed to comprehensively bad American leadership, a crisis in authority and legitimacy that has left a functional vacuum in every executive office throughout the land — from the White House to the state houses, to the lairs of the CEOs, to the towers of the deans and department chairs, to the glitzy sets of the nightly news deliverers, to the makeshift quarters of the NGO chiefs. In former times, clueless and impotent leaders stuck their heads in the sand. Nowadays, with pandemic narcissism abroad in the land, the heads are more usually inserted into the aperture that leads into the large bowel….

But I indulge in diverting objurgation when I should perhaps explain this American perestroika more clearly. The Russian word roughly translates to “restructuring.” They flubbed it in 1989 because their system was too ossified and too far gone — though history and circumstance eventually did it for them. A similar outcome is possible here, too, in which things just have to completely fall apart before emergent reorganization occurs. But you can be sure that if we allow this to happen, an awful lot of things will get smashed along the way, including lives, careers, families, property, and cherished institutions.

This monster we call the economy is not just an endless series of charts and graphs — it’s how we live, and that has to change, whether we like it or not. Now, it is obviously a huge problem that a majority of Americans don’t like the idea. If they were true patriots, instead of overfed cowards and sado-masochists, they’d be inspired by the prospect. But something terrible has happened to our national character since the triumphal glow of World War Two wore off. I just hope that the Palinites and the myrmidons of Glen Beck don’t destroy what’s left of this country in a WWF-style “revolution.” In the best societies, such are marginalized by a kinder and sturdier consensus about justice. In America today, the center is not holding because there is no center.

American perestroika really boils down to this: we have to rescale the activities of daily life to a level consistent with the mandates of the future, especially the ones having to do with available energy and capital. We have to dismantle things that have no future and rebuild things that will allow daily life to function. We have to say goodbye to big box shopping and rebuild Main Street. More people will be needed to work in farming and fewer in tourism, public relations, gambling, and party planning. We have to make some basic useful products in this country again. We have to systematically decommission suburbia and reactivate our small towns and small cities. We have to prepare for the contraction of our large cities. We have to let the sun set on Happy Motoring and rebuild our trains, transit systems, harbors, and inland waterways. We have to reorganize schooling at a much more modest level. We have to close down most of the overseas military bases we’re operating and conclude our wars in Asia. Mostly, we have to recover a national sense of common purpose and common decency. There is obviously a lot of work to do in the list above, which could translate into paychecks and careers — but not if we direct all our resources into propping up the failing structures of yesterday.

The most dangerous illusion, of course, is a belief that we can return to a hyped up turbo debt “consumer” economy — and perhaps the most disappointing thing about Barack Obama, is his incessant cheerleading for a “recovery” to what is already lost and unrecoverable. The man who ran for office on “change” doesn’t really have the stomach for it. But, of course, events are in the driver’s seat now, not personalities, even charming ones. I’d venture to say that if Mr. Obama thinks he’s seen a crisis, and gotten through it, then he ain’t seen nothin’ yet. We are for sure not returning to the kind of credit orgy that made the last twenty years such a nauseating spectacle — of which, by the way, the misfeasances and wretched excesses of Wall Street were just one manifestation.

Some theorists out there say that economy follows mood, not vice-versa, and that the anger and sourness on display around the USA, in events like the weekend Washington march, is a clear sign that tectonic shifts in the structures of everyday life are sure to follow. There are too many truly good and intelligent people in this country, to leave our fate to the Palins and the Glen Becks [and Obamas—ed.] But the good people had better man up and start telling the truth with some conviction that the truth matters.

Regards,
James Howard Kunstler

September 17, 2009

Reality Receding Across America was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Did that phrase have any effect–other than to help elect a presidential challenger–on our doing financial business as usual?  Nope.  Sure, we were on a bull run with a roaring (we thought) economy.  Everyone who wanted a house could get one, even if they couldn’t afford it.  Never mind if that six-figure mortgage, secured frequently by a four-figure (or less) income meant that you were upside down from the get go.  Option ARMs let you have your cake and eat it, too.  One of the more creative approaches was the Stated Income Stated Assets Loan, also known as a SISA (Liar’s) loan. Yep, it was and is exactly what it sounds like.  The income listed on the mortgage loan application was accepted as exactly what you said it was without any verification whatsoever.  This particular loan is now about as rare as the passenger pigeon due to the mortgage collapse.

Property values were always going to increase from here to eternity, so all you had to do was wait a while, refinance after your salary had increased (as it always had) and your home’s market value had multiplied.  Then you would have a standard 30-year mortgage, low interest rate, high income, money in the bank, stock investments and a 401K.  Life was good and you could concentrate on your golf game every weekend.

What everyone forgot, or ignored due to the good life blinders they were wearing, was a rather trite phrase that happens to be truth in a nutshell: What goes up must come down.

Fifteen years later came the mortgage meltdown and a global financial collapse.  A year after that, we managed to infect Washington, D.C. with an administration that seems determined to reduce the U.S. to the status of a third world country, complete with nationalization of its remaining industries, tax increases that would break the back of Atlas and an infantile belief that we’re on the road to recovery.

Y’all know that that Government Motors…ahem, General Motors…has been bailed out to the tune of tens of billions of dollars, with virtually no chance that any of it will ever be recovered.  Healthcare is the latest target in the crosshairs.  Opposed by darn near every person with a brain and the ability to read even a few pages of the proposed legislation, there is still a very real chance that it will be rammed down our throats by our erstwhile elected officials who are not only supposed to act in our best interests but actually listen to our comments during town hall meetings, by reading our emails, snail mail and paying attention to phone calls.

Do we need healthcare reform in some respects?  Of course we do.  No system, public or private, is perfect.  But the word is ‘reform’ or ‘improvement’, not ‘nationalization.’

Tax increases ain’t hit us yet, at least not in any widespread manner.  But they’re coming.  In fact, they’re already here in the form of increased fees that are being instituted by everyone from utility companies to towns and cities.  And just wait till the cap & tax…sorry, I meant cap & trade… bill is passed, signed and forwarded to your checking account.  What was a relatively healthy account, or at least surviving, will shortly wind up on life support.

So how is cap & trade going to be a tax increase on every person?  Simple.  That legislation, if enacted, will focus energy production on the so-called ‘green energy.’  Any method that produces carbon will be heavily taxed.  The result will be dramatic increases in the cost of electricity and since we all use electricity in some way, shape or form…including ways that most of us don’t even think about…every person in this country will be paying an increased tax as the result of rising prices on virtually everything.

Conservation, energy efficiency and reduction of your carbon footprint will become watchwords, possibly even additions to your local ordinances.

As for trying to jawbone this country onto the road to economic recovery, President Obama wandered several miles into fantasyland with his recent speech before Congress.  While his focus was the embattled healthcare legislation, he did manage to address the economic conditions with a two paragraph opening statement in which he said:

“When I spoke here last winter, this nation was facing the worst economic crisis since the Great Depression.  We were losing an average of 700,000 jobs per month. Credit was frozen. And our financial system was on the verge of collapse.

“But thanks to the bold and decisive action we have taken since January, I can stand here with confidence and say that we have pulled this economy back from the brink.”

Does this correlate with a 9.7% – 16% (depending on whose statistics you use) unemployment, ongoing foreclosures with many more to come, businesses closing, many States dealing with multi-billion dollar budget deficits, some perilously close to default, deflation in a few areas, etc, ad infinitum?

Of course, when this country only loses 216,000 jobs in August compared to 700,000 last January, I suppose you could argue that we’re moving in the right direction.  And let’s not forget that our financial problems were over when we discovered that printing presses actually functioned 24/7, enabling us to print fiat money…or Monopoly money if you prefer…whenever we needed it.  As long as we don’t run out of ink.  Happy days are here again!

Maybe it’s not the economy, stupid.

What do you think?

Regards,
Richard Marmo

September 11, 2009

Once Again, Stupid, It’s The Economy was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.