Thursday should be exciting. That's the day of the G-20 economic summit in London. But I think they should have picked a different locale for it. Some place no one had ever heard of, or could find on a map. Sort of like when Dick Cheney would be spirited away to an "undisclosed location" even though we knew they had issued a TFR in Wyoming for him. The problem with this G-20 meeting is that it isn't a good time for bankers to be getting together, much less the heads of state to discuss the economic mess.
I'm sure security will be tight, and most likely there will only be the usual low-grade violence that you normally see in third-world countries, which England is well on its way to becoming. So with any luck there will only be a few arrests, and no one gets killed. The meeting itself could be even more contentious than the protests going on outside. Already most of the major economies, i.e. the US, UK, Japan and Switzerland have gone down the path of quantitative easing (in plain English, money printing.)
Conspicuous by its absence from that list is the European Union. If it were up to the Mediterrean countries, the aptly named PIGS (Portugal, Italy, Greece, and Spain) the ECB would already by happily inflating along with the rest of the world. But the Germans have long memories of the Weimar Republic, and so Europe will be the last to inflate. But mark my words, they WILL inflate, because everyone else will. As everyone else cuts rates to zero, the ECB had to follow, and so they will have to continue in each round of competitive devaluations. Thus, gold and silver will appreciate against all currencies.
French president Sarkozy has already threatened to walk out of the summit meeting, and the Germans have apparently leaked a copy of the report to be issued on the final day. It's nice to know the results of the meeting have already been planned in advance. Sort of like the old Soviet political apparatus announcing the final vote tally the day before the election. So now UK Prime Minister Gordon Brown looks like a complete idiot (not hard for him - remember, he was the guy who sold half of the Bank of England's gold reserve at $252/oz) and the French are blaming the Anglo-Saxons, or in other words the US and UK, for the world's financial problems.
Play nice, children.
Tuesday, March 31, 2009
Sunday, March 22, 2009
The day the Fed blinked
Some day we will look back at Wednesday, March 18 as the day the US Dollar started down the path to rampant inflation. Early in the day, the new CPI figure came in higher, and the price of oil was higher. You'd think the price of precious metals would be higher too, but the Gold Cartel was at work, and the gold price had been driven down to almost $880, and silver was below $12.
Then the Fed made an announcement that it would purchase $300 billion of treasury bonds, $100 billion of agency bonds, and $750 billion of agency-guaranteed mortgages over the next six months. That's $1.15 trillion, and that's in addition to all of the other purchases the Fed has made. Where is the Fed going to get all that money? That's easy: it will create the money out of thin air.
Within 15 minutes, the price of gold had rallied $38, and silver was even stronger. The rally continued on Thursday, and now gold trades at $952 and silver at $13.73. I think the market is finally getting it. We aren't going to see deflation. The CPI, as doctored as it is, was up even though we are in the deepest recession since the 1930's. The most basic industrial materials, copper and oil, have climbed off their lows, and the Baltic Dry Index (an important indicator of international trade) has also rallied.
Finally, this $1.15 trillion is only the beginning. A down payment, if you will, on much larger bailouts to come. No one thinks this $300 billion is the end. You can't run the US government for very long on a piddling $300 billion. It is possible that the Chinese demanded it; that the Fed will be buying treasuries that China wants to sell to fund its own stimulus program. But one thing is certain: the Treasury will continue to scramble to raise money. Tomorrow, Geithner will announce another scheme to try to foist some more toxic assets on unsuspecting investors, if they can find any.
The Public Investment Corporation will spend another $1 trillion on toxic assets, which they will try to sell to hedge funds or other private investors (read suckers.) The government will offer low-cost loans and will even share some of the risk if (when) the value of those assets falls even further. It may have a different name, or a new acronym, but it's still the same old scam. It all adds up to more inflation, and much higher prices for commodities and tangible assets.
Then the Fed made an announcement that it would purchase $300 billion of treasury bonds, $100 billion of agency bonds, and $750 billion of agency-guaranteed mortgages over the next six months. That's $1.15 trillion, and that's in addition to all of the other purchases the Fed has made. Where is the Fed going to get all that money? That's easy: it will create the money out of thin air.
Within 15 minutes, the price of gold had rallied $38, and silver was even stronger. The rally continued on Thursday, and now gold trades at $952 and silver at $13.73. I think the market is finally getting it. We aren't going to see deflation. The CPI, as doctored as it is, was up even though we are in the deepest recession since the 1930's. The most basic industrial materials, copper and oil, have climbed off their lows, and the Baltic Dry Index (an important indicator of international trade) has also rallied.
Finally, this $1.15 trillion is only the beginning. A down payment, if you will, on much larger bailouts to come. No one thinks this $300 billion is the end. You can't run the US government for very long on a piddling $300 billion. It is possible that the Chinese demanded it; that the Fed will be buying treasuries that China wants to sell to fund its own stimulus program. But one thing is certain: the Treasury will continue to scramble to raise money. Tomorrow, Geithner will announce another scheme to try to foist some more toxic assets on unsuspecting investors, if they can find any.
The Public Investment Corporation will spend another $1 trillion on toxic assets, which they will try to sell to hedge funds or other private investors (read suckers.) The government will offer low-cost loans and will even share some of the risk if (when) the value of those assets falls even further. It may have a different name, or a new acronym, but it's still the same old scam. It all adds up to more inflation, and much higher prices for commodities and tangible assets.
Tuesday, March 17, 2009
The stuff revolutions are made of
In the fourth quarter of last year, the insurance giant AIG lost $61.7 billion. That's more than $20 billion a month. Consequently, AIG has received bailouts of $170 billion from the Treasury department to keep it afloat. Unfortunately we can't let AIG go belly up, because it would take the entire financial system with it. So the taxpayers have to keep throwing good money after bad. As bad as that is, AIG just paid $165 million in bonuses to its employees.
That is money which was given to them by the taxpayers, at a time when millions of Americans have lost their jobs, and millions more are out of work. The company maintains that those bonuses are in the employee contracts, and are required to be paid by law. If it's hard to understand why anyone at AIG deserves a raise (note Exhibit A: the above mentioned $61.7 billion loss) then remember that AIG was actually a profitable insurance company. The company as a whole was making money, except for one unit. The one that engaged in financial engineering, and traded derivatives to bring down the entire company. So they are giving bonuses to the trading department in order to keep those talented individuals in the fold.
I never would have believed it, but Congress has come up with an ingenious solution. Yes, the United States Congress! They are going to sponsor legislation that taxes bonuses received by employees of companies that receive federal bailouts at the rate of 100%. I never thought I would be in favor of Congress inventing new and higher taxes, but I can live with this one. OK, your contract says you have to be paid this $1 million bonus. Now please remit $1 million in taxes to the US Treasury, or we will throw you in prison. Have a nice day, Mr. Expert Derivatives Trader. End of rant.
The price of oil is back up to $48, which I believe is signalling a return to normalcy. Market technicians, and others who read goat entrails say oil has broken above its 50-day moving average, and that's supposed to be good. I can agree with that, and I think it points to better days ahead for the entire commodity complex, especially gold and silver, which can stand on their own, and do not need an economic recovery to do well.
That is money which was given to them by the taxpayers, at a time when millions of Americans have lost their jobs, and millions more are out of work. The company maintains that those bonuses are in the employee contracts, and are required to be paid by law. If it's hard to understand why anyone at AIG deserves a raise (note Exhibit A: the above mentioned $61.7 billion loss) then remember that AIG was actually a profitable insurance company. The company as a whole was making money, except for one unit. The one that engaged in financial engineering, and traded derivatives to bring down the entire company. So they are giving bonuses to the trading department in order to keep those talented individuals in the fold.
I never would have believed it, but Congress has come up with an ingenious solution. Yes, the United States Congress! They are going to sponsor legislation that taxes bonuses received by employees of companies that receive federal bailouts at the rate of 100%. I never thought I would be in favor of Congress inventing new and higher taxes, but I can live with this one. OK, your contract says you have to be paid this $1 million bonus. Now please remit $1 million in taxes to the US Treasury, or we will throw you in prison. Have a nice day, Mr. Expert Derivatives Trader. End of rant.
The price of oil is back up to $48, which I believe is signalling a return to normalcy. Market technicians, and others who read goat entrails say oil has broken above its 50-day moving average, and that's supposed to be good. I can agree with that, and I think it points to better days ahead for the entire commodity complex, especially gold and silver, which can stand on their own, and do not need an economic recovery to do well.
Tuesday, March 10, 2009
Revisionist history and the free market
After listening to so many free market advocates criticize everything the government does (no matter what it does) they all start to sound like a broken record. To begin with, the free market will not solve all of our economic problems.
One such expert on revisionist history is Jim Puplava, the creator of an outstanding website, and host of an informative weekly podcast. However, his economic views tend to favor whatever is best for Jim Puplava, and not the country as a whole. For example, he sees no difference between Hoover and FDR; that their economic policies were the same, and only lengthened the Great Depression. Most amazing of all, he gives the credit for our economic recovery to World War II.
Note to Jim Puplava: war is not good for the economy. Military spending is completely non-productive, and the money could have been better spent to create jobs without getting millions of people killed. Further, he criticizes FDR for campaigning in 1940 on a pledge to keep America out of World War II, and then breaking his promise. Well, was that really his fault? After the Japanese bombed Pearl Harbor, we were pretty much committed to entering the war, weren’t we?
The simple fact is that FDR was one of our greatest presidents because he brought America out of the depression, and won World War II. Bad presidents don’t get elected four times, and we don’t put bad presidents on our coinage. Further, war hasn’t helped our economy lately, has it? I mean, unless you happen to be Halliburton or one of the other defense contractors. Bush gave us two wars, and all they did was increase the deficit spending with no end in sight.
The other commentator who has the same blind spot is Peter Schiff, president of Euro Pacific Capital. You may have seen him, as he endlessly promotes himself, his books, his radio and TV appearances, and so on. His brokerage firm charges very high commissions, but he made a lot of money for his clients from 2001-2007. Then in 2008 his clients lost half of their money just like everyone else. That has never stopped him from trumpeting the fact that he saw the economic mess coming, even if his investments crumbled like the rest of the global stock markets.
Schiff is another government-hater, although his predisposition may be genetic. His father decided that the income tax was illegal, refused to pay it, and wrote books encouraging others to do the same. As you might expect the elder Schiff has spent a great deal of time in the slammer. The government got so tired of his nonsense that he was finally sentenced to 12 years in prison, even though he was 78 years old at the time.
So Peter Schiff hates everything about the government, and thinks anyone who works in the public sector is incompetent. Needless to say, he is opposed to any government bailouts, and thinks everything will work out if companies are allowed to fail. That may work in the ivory tower of Austrian economics, but in the real world it will get you killed.
First of all, the expansion of debt has gone much too far. Allowing large companies to fail would result in a disaster that would make the Great Depression look like a cakewalk. We saw this with the collapse of Lehman Brothers. The government followed the free market dogma last September, and the result was a run on the money markets, and brought the entire economic system to the brink of collapse. That means no credit for anyone. No commercial paper for businesses, so they can’t meet their payrolls, so millions of people are thrown out of work. Those millions of people can’t pay their bills, so millions of businesses fail. This is how a temporary matter of illiquidity results in insolvency, and then bankruptcy for otherwise healthy businesses. Then the effects ripple throughout the economy. So much for the healing effects of free market capitalism.
One final note about government programs. From listening to Puplava and Schiff, you’d think Social Security and Medicare were the worst atrocities ever committed by America. It doesn’t matter to them that Social Security lifted tens of millions of people out of poverty. It doesn’t matter to Puplava and Schiff that without Medicare and other similar programs, virtually everyone in this country would die broke. Because unless you are super rich, or you suddenly die of a heart attack, you can look forward to enormous medical bills at the end of your life. One day in a semi-private hospital room costs $3,500, and that doesn’t count the cost of medical care.
Let the free market have its way and medical insurance won’t become less expensive through market efficiency: it will disappear. Try buying a medical insurance policy on your own today and see what it costs. In hard times, employers will be the first to drop medical insurance because workers will be so desperate for jobs that they’ll be willing to give up fringe benefits. Make no mistake about it: in the absence of these expensive government programs that the free marketers hate so much, no one can afford a serious illness and if you live long enough, medical expenses will bankrupt you.
So we have to keep bailing out AIG, Citigroup, Bank of America, and all the rest, because the alternative is even worse. But these companies need to be temporarily nationalized, the shareholders wiped out, and the companies broken up or liquidated. The much smaller companies that can be profitable can then be privatized. Further, much to the dismay of Puplava and Schiff, we need government regulation. Lots of it! There’s a reason we had Glass-Steagall. Banks should not be allowed to lever themselves 30-1 like hedge funds. If they win, they keep the profits, and if they lose, the taxpayers pay for the bailouts. That game is over. We need a new SEC, or a successor organization with some teeth, and it should be run by prosecutors, not executives from the financial industry that it is supposed to be regulating. We’ve seen what happens when the financial industry is allowed to self-regulate. Schiff and Puplava notwithstanding, the mess we’re in now explains why we need a strong government.
One such expert on revisionist history is Jim Puplava, the creator of an outstanding website, and host of an informative weekly podcast. However, his economic views tend to favor whatever is best for Jim Puplava, and not the country as a whole. For example, he sees no difference between Hoover and FDR; that their economic policies were the same, and only lengthened the Great Depression. Most amazing of all, he gives the credit for our economic recovery to World War II.
Note to Jim Puplava: war is not good for the economy. Military spending is completely non-productive, and the money could have been better spent to create jobs without getting millions of people killed. Further, he criticizes FDR for campaigning in 1940 on a pledge to keep America out of World War II, and then breaking his promise. Well, was that really his fault? After the Japanese bombed Pearl Harbor, we were pretty much committed to entering the war, weren’t we?
The simple fact is that FDR was one of our greatest presidents because he brought America out of the depression, and won World War II. Bad presidents don’t get elected four times, and we don’t put bad presidents on our coinage. Further, war hasn’t helped our economy lately, has it? I mean, unless you happen to be Halliburton or one of the other defense contractors. Bush gave us two wars, and all they did was increase the deficit spending with no end in sight.
The other commentator who has the same blind spot is Peter Schiff, president of Euro Pacific Capital. You may have seen him, as he endlessly promotes himself, his books, his radio and TV appearances, and so on. His brokerage firm charges very high commissions, but he made a lot of money for his clients from 2001-2007. Then in 2008 his clients lost half of their money just like everyone else. That has never stopped him from trumpeting the fact that he saw the economic mess coming, even if his investments crumbled like the rest of the global stock markets.
Schiff is another government-hater, although his predisposition may be genetic. His father decided that the income tax was illegal, refused to pay it, and wrote books encouraging others to do the same. As you might expect the elder Schiff has spent a great deal of time in the slammer. The government got so tired of his nonsense that he was finally sentenced to 12 years in prison, even though he was 78 years old at the time.
So Peter Schiff hates everything about the government, and thinks anyone who works in the public sector is incompetent. Needless to say, he is opposed to any government bailouts, and thinks everything will work out if companies are allowed to fail. That may work in the ivory tower of Austrian economics, but in the real world it will get you killed.
First of all, the expansion of debt has gone much too far. Allowing large companies to fail would result in a disaster that would make the Great Depression look like a cakewalk. We saw this with the collapse of Lehman Brothers. The government followed the free market dogma last September, and the result was a run on the money markets, and brought the entire economic system to the brink of collapse. That means no credit for anyone. No commercial paper for businesses, so they can’t meet their payrolls, so millions of people are thrown out of work. Those millions of people can’t pay their bills, so millions of businesses fail. This is how a temporary matter of illiquidity results in insolvency, and then bankruptcy for otherwise healthy businesses. Then the effects ripple throughout the economy. So much for the healing effects of free market capitalism.
One final note about government programs. From listening to Puplava and Schiff, you’d think Social Security and Medicare were the worst atrocities ever committed by America. It doesn’t matter to them that Social Security lifted tens of millions of people out of poverty. It doesn’t matter to Puplava and Schiff that without Medicare and other similar programs, virtually everyone in this country would die broke. Because unless you are super rich, or you suddenly die of a heart attack, you can look forward to enormous medical bills at the end of your life. One day in a semi-private hospital room costs $3,500, and that doesn’t count the cost of medical care.
Let the free market have its way and medical insurance won’t become less expensive through market efficiency: it will disappear. Try buying a medical insurance policy on your own today and see what it costs. In hard times, employers will be the first to drop medical insurance because workers will be so desperate for jobs that they’ll be willing to give up fringe benefits. Make no mistake about it: in the absence of these expensive government programs that the free marketers hate so much, no one can afford a serious illness and if you live long enough, medical expenses will bankrupt you.
So we have to keep bailing out AIG, Citigroup, Bank of America, and all the rest, because the alternative is even worse. But these companies need to be temporarily nationalized, the shareholders wiped out, and the companies broken up or liquidated. The much smaller companies that can be profitable can then be privatized. Further, much to the dismay of Puplava and Schiff, we need government regulation. Lots of it! There’s a reason we had Glass-Steagall. Banks should not be allowed to lever themselves 30-1 like hedge funds. If they win, they keep the profits, and if they lose, the taxpayers pay for the bailouts. That game is over. We need a new SEC, or a successor organization with some teeth, and it should be run by prosecutors, not executives from the financial industry that it is supposed to be regulating. We’ve seen what happens when the financial industry is allowed to self-regulate. Schiff and Puplava notwithstanding, the mess we’re in now explains why we need a strong government.
Wednesday, March 4, 2009
The return of inflation
Although the precious metals have sold off in the past week, with gold down 10% and silver somewhat more, this is just a normal correction, as no market goes straight up. I think the next few months will show seasonal strength for both metals. We have had all of the ingredients for a bull market for the past decade now, and the case is only getting stronger.
In addition to declining mining supply and increasing monetary demand from investors, it is becoming harder and harder for mining companies to find new deposits to replace their reserves. On top of everything else, the new U.S. government is embarking on fiscal stimulus to break the bank. Some of it may be the infrastructure that we need, and some of it may be the (pork) spending programs that the Democrats have wanted for the past eight years. Any way you look at it, we can't afford it.
Ben Bernanke is of the opinion that we need to flood the system with money right now to avert the fiscal crisis, but that the liquidity can be withdrawn from the system once the crisis has passed. I don't know if he honestly believes that, or he is just being political, but if that is somehow possible, I wish someone would explain to me how it works.
The government has to fund its operating expenses by issuing Treasury bonds. Unfortunately, the gullible foreigners who used to buy them (Japanese, Chinese, Arabs, etc.) now have so many T-Bonds that they can't or won't buy as many as we need to sell. So they government has to sell the unsold bonds to the buyer of last resort: the Federal Reserve.
Uncle Ben's Fed has the luxury of a printing press, and can create all the currency (or in this case, digital money) it needs to buy every last unsold T-Bond. And if you've taken a look at the Fed's balance sheet lately, you'll see that it has done just that. It is swollen with not only T-Bonds, but also the impaired mortgage-backed securities that it swapped with insolvent banks for, to keep them from looking too obviously bankrupt.
So when the day comes that Prof. Bernanke decides the crisis has passed, banks are lending, business is booming, he will attempt to put the genie back in the bottle. To drain liquidity from the financial system, he will have to sell the Fed's T-Bonds, and send the cash proceeds back to whatever dimension the money was conjured from. The part I'm missing is how he is going to sell the T-Bonds. They are in what is commonly known as an "Owl" market.
An Owl market is when you call your broker, and tell him to sell, and he says, "To Whoooooom? To Whooooom?" Never mind the toxic junk that's worth pennies on the dollar, just think about the 10-year or 30-year T-Bonds that pay 3% interest. When inflation is raging, who will want to be locked into earning 3% interest for the duration? The simple fact is that T-Bonds are the last remaining bubble, and everyone knows it. Everyone wants to sell them, but to do so would collapse the market and send interest rates skyward.
Did you ever squeeze too much toothpaste out of the tube...and then try to put it back in? So good luck, Ben, when you try to sell those bonds and drain liquidity out of the system.
In addition to declining mining supply and increasing monetary demand from investors, it is becoming harder and harder for mining companies to find new deposits to replace their reserves. On top of everything else, the new U.S. government is embarking on fiscal stimulus to break the bank. Some of it may be the infrastructure that we need, and some of it may be the (pork) spending programs that the Democrats have wanted for the past eight years. Any way you look at it, we can't afford it.
Ben Bernanke is of the opinion that we need to flood the system with money right now to avert the fiscal crisis, but that the liquidity can be withdrawn from the system once the crisis has passed. I don't know if he honestly believes that, or he is just being political, but if that is somehow possible, I wish someone would explain to me how it works.
The government has to fund its operating expenses by issuing Treasury bonds. Unfortunately, the gullible foreigners who used to buy them (Japanese, Chinese, Arabs, etc.) now have so many T-Bonds that they can't or won't buy as many as we need to sell. So they government has to sell the unsold bonds to the buyer of last resort: the Federal Reserve.
Uncle Ben's Fed has the luxury of a printing press, and can create all the currency (or in this case, digital money) it needs to buy every last unsold T-Bond. And if you've taken a look at the Fed's balance sheet lately, you'll see that it has done just that. It is swollen with not only T-Bonds, but also the impaired mortgage-backed securities that it swapped with insolvent banks for, to keep them from looking too obviously bankrupt.
So when the day comes that Prof. Bernanke decides the crisis has passed, banks are lending, business is booming, he will attempt to put the genie back in the bottle. To drain liquidity from the financial system, he will have to sell the Fed's T-Bonds, and send the cash proceeds back to whatever dimension the money was conjured from. The part I'm missing is how he is going to sell the T-Bonds. They are in what is commonly known as an "Owl" market.
An Owl market is when you call your broker, and tell him to sell, and he says, "To Whoooooom? To Whooooom?" Never mind the toxic junk that's worth pennies on the dollar, just think about the 10-year or 30-year T-Bonds that pay 3% interest. When inflation is raging, who will want to be locked into earning 3% interest for the duration? The simple fact is that T-Bonds are the last remaining bubble, and everyone knows it. Everyone wants to sell them, but to do so would collapse the market and send interest rates skyward.
Did you ever squeeze too much toothpaste out of the tube...and then try to put it back in? So good luck, Ben, when you try to sell those bonds and drain liquidity out of the system.
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