Oct 29

Don’t Get Bullish on Gold Below $1350

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This month’s “triple bottom” is not, repeat NOT, confirmed says this technical analyst…

WAYNE KAUFMAN is chief market analyst at Phoenix Financial in New York.
Regularly quoted in the media and interviewed on Fox, CNBC and the BBC, Kaufman produces a daily report for Phoenix, is a member of the Market Technicians Association, and has taught level 3 of the MTA’s three-level online course for Chartered Market Technician candidates.
Here Kaufman speaks to Mike Norman on behalf of Hard Assets Investor about how he sees the big picture right now…
Hard Assets Investor: We’ve seen some crazy gyrations in gold, in the Dollar, in oil, even in stocks. Summarize how it looks to you.
Wayne Kaufman: In terms of US equities, we’ve been watching a deterioration of underlying market breadth, that hasn’t shown up, or had not shown up in the major indexes until the last couple of weeks. But for the last three or four months, we’ve been watching small-caps get decimated. And then the midcaps followed. And then the large-caps, S&P 500, had a peak recently. But the breadth was terrible.
And now the stocks have rolled over. It’s to the point where you’ve only got about 18% of S&P 1500 stocks over their own 50-day moving average, less than one in five. About one in three are still over their 200-day moving average. So that underlying deterioration came through and pulled down the majors.
HAI: Now with small stocks weak like that, wouldn’t that suggest general economic weakness, or at least a tipoff to that effect, that we’re seeing basically small, medium-sized businesses not doing very well?
Kaufman: Definitely. You’re right. You’re talking about changes taking place. The question in the mind of investors right now is, we’re seeing the weakness in China, in Europe, in Germany suddenly rolling over. You’ve got the price of oil. It’s all of these things that are turning dramatically. Is this a long-term trend change? Or is this just going to be short term? Is it just typical October stuff, in the case of equities? That’s what we’re going to find out over the next few weeks.
HAI: But is there really a downside, when people know the central banks are going to be there, push comes to shove?
Kaufman: There, at a point, is only going to be so much that the central banks can do. I was recently asked by a news outlet to give my projections for the S&P, and my reasoning. My No. 1 reason for being bullish is central banks around the world will do everything possible to prevent a global recession. Are they really able to do much more? We know they’ll try. Are they going to wait too long before they do? How effective can they be?
HAI: Last time you were here, you were negative on gold. And that play worked out pretty well. How do you see things panning out from this point?
Kaufman: I see short-term, over-sold and over-bearish sentiment. So a bounce is definitely in the cards, especially if there’s some short covering by people who are short the futures. But when I was here last time, I said I couldn’t get bullish unless gold broke $1400 or so. Now that number is a little lower.
HAI: Where is it?
Kaufman: $1300. I need to see $1350 at least, because you do have a potential triple bottom. A lot of people say, “Oh, triple bottom.” It’s a potential triple bottom that doesn’t get confirmed until you break unimportant resistance. Unless we can get above $1350, I’m not going to start thinking about getting bullish, except for oversold, over-bearish bounces.
HAI: We had a guest recently talking about the death of gold. Reminds me of the death of equities back on the infamous 1979 Business Weekcover. What do you make of that?
Kaufman: I agree. That’s why I’m saying I could see a bounce here, because it’s oversold, and it’s over-pessimistic. Levels of pessimism are extreme. And when you see that, that’s a good time to take the other side of that trade. The question is, how much staying power? You’re talking about commodities going down. The Dollar has been strong, which is a little too much bullishness in the Dollar. That certainly can be capped here.
But oil is just amazing. For years, you always said that the Saudis controlled the price of oil. You were 100% right. Because they’re the only country that really has significant excess capacity. Right now, are the Saudis purposely trying to drive the price of oil down, so that they can try and put a cap on fracking and energy exploration and production here in the States?
HAI: The shale guys, the shale producers.
Kaufman: Potentially an amazing tactical war going on between the Saudis and the US, in terms of oil production.
HAI: I saw an example of that back in the ’80s, when I was an oil trader on the floor of this very exchange, when they crashed the price down. That was a message sent to the non-Opec producers, the North Sea guys in particular. So I think you’re absolutely right. 
You mentioned the Dollar. That was a surprise to most people, because we had this narrative, for a long time, about money printing, and central banks, and quantitative easing, and hyperinflation and the Fed doing all this. Yet, look at the Dollar.
Kaufman: I don’t want to seem like I’m complimenting you because you’re the host, but you said this a long time ago.
HAI: Don’t hold back…
Kaufman: You said a long time ago, all the inflation guys, that they were wrong, they were going to be wrong. You were 100% right. So it was a big surprise. Now, as a technician, I called the Dollar going up at a point when I saw it giving me buy signals. I don’t do it the intuitive or the economist way. It’s extremely overbought. And it’s extremely over-bullish. It has been taking a pause. I think it’ll continue to pause here. It’s just too many people on that side of the trade at this point.
HAI: We heard comments recently from New York Fed President William Dudley, to the effect that a Dollar that’s too strong might hinder our ability to achieve our goals. Hint, hint, a little bit of code words there…
Kaufman: You’re right. But the problem they have is that the strong Dollar is going to hurt exports, obviously. But you’ve got S&P 500 companies due in the neighborhood of 40% of revenues, 50% of profits overseas. So, whether it’s from the strong Dollar or just because the economies overseas are very weak right now, no matter how you go on that, it’s going to be a problem. And the world economy needs to clear up. We’re not an island unto ourselves; it will affect us. And I think that’s what equities are starting to show.
HAI: Good points. Wayne, always great to have you here. Thanks very much.
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Sep 24

Stupid Writ Large

Gold Price Comments Off on Stupid Writ Large
Battling the forces of BBTs and DMN our hero invites them to pull the other one…

FOR SEVERAL WEEKS, the tragic soul of The Mogambo has been troubled by subtle undertones in The Force, writes the tragic Mogambo Guru from inside his bunker, inexplicably using an old Star Wars metaphor.
Which brings up the interesting question as to how a Jedi light-saber would fare against a couple of belt-fed .50 caliber machineguns at point-blank range.
Other than pondering those kinds of deeply philosophical questions, it was the old “It’s quiet. Too quiet” kind of thing, where you are always nervously looking over your shoulder, and seeing enemies lurking in every shadow, every nerve on the razor’s edge. Trigger fingers twitching, too, which is difficult to say five times quickly, which only proves the point.
For instance, I started sensing strange vibrations in what people were saying, such as Paul Krugman, Janet Yellen and others, as concerns monetary policy.
And when I call them up to demand an explanation, and maybe helpfully explain how they are mere Earthling idiots who don’t know squat about economics, they won’t take my calls!
I mean, I clearly tell the receptionist that I am the Fabulous Mogambo Genius (FMG) on the line here, and I am calling to explain to them how their whole idiotic Keynesian idea of Quantitative Easing has been a big, fat, flatulent bust, and I want to find out what they are going to propose to do next, as concerns monetary policy, and it better NOT be any more of that stupid Quantitative Easing crap, as I am prepared to clearly and loudly detail how they must be the biggest idiots in the whole world to actually believe that the profound inflationary and bankrupting stupidity of vastly increasing the money-supply (and thus vastly increasing debt), and then committing that same incredible, suicidal folly over the long-term, could possibly, highly-improbably, one chance-in-a-million, one chance-in-a-zillion years, work!
But, alas, I never get through to anyone. Ever!  Even after I CLEARLY explained to the receptionist who I am and exactly why I, the Fabulous Mogambo Genius (FMG), am calling, so as to hopefully speed things along.
Even parsing their oily remarks through a Junior Mogambo Ranger Secret Decoder Ring (JMRSDR) yielded, alas, nothing.
Thus, I am left exhausted and confused, with an increased sense of dread, as actually befits the situation, but knowing little else about what’s ahead, monetary-wise.
Nonetheless, I instinctively knew something BIG was up, as my furrowed brow, exaggerated startle-reflex, and a frenzy of buying gold, silver, and defensive armaments so colorfully indicated. 
And, thinking about it, with your heart pounding, covered in a cold, clammy sweat, you suddenly realize that, alarmingly, the only thing it COULD be is a new, colossal attempt by the Federal Reserve and the government to somehow, some miraculous way, some fabulous way, some glorious deus ex machina way, please, please, please let this new version of massive Quantitative Easing work, even though 2,500 years of global economic history, a sad tale of one dirtball government after another bankrupting itself, with or without creating paper money in its death throes, proves that it can’t, and it won’t.
Of course, since I am the aforementioned Fabulous Mogambo Genius (FMG) of story and song, I always knew that the ultimate fate of grotesquely expanding the money supply to expand the size of government was to inexorably have to, in one fashion or another, relive the infamous “bread and circuses” policies of ancient Rome, the government desperately placating the teeming, impoverished masses, suffering as they are from rising prices, a large, oppressive government and abysmal living conditions, by giving them food and entertainment, which is a disastrous policy that always leads to Bad Bad Things (BBT).
So, was I more paranoid and cynical than usual, or was something actually, you know, up.  But what?
Who knew that it would be brought to my attention by Zerohedge.com, with the chilling title “It Begins”? When I saw it, I thought I heard banshees wailing, and ravenous wolves howling in the distance, growing frightfully closer. Ever closer.
“It Begins”, I am sorry to say, is not the title of a terrific new horror movie, a grand and glorious gore-fest of bloody, gun-happy shoot-’em-up action, fiery explosions, high-speed car chases and hordes of mutant zombies who mostly look like beautiful lingerie models, only less clothed.
Instead, “It Begins” refers, even more horribly and tragically, to an article in Foreign Affairs magazine, written by Mark Blyth and Eric Lonergan, of the Council on Foreign Relations, which is spooky enough.
To save you the trouble of rubbing your eyes in complete disbelief, it goes on that “Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.”
Giving cash away! It’s bread and circuses, alright, in spades!  “Here’s some money to buy your own food and circus!” Wow!
The authors, who are so wrong about so many important things in the article, are nonetheless absolutely right when they say “In the short term, such cash transfers could jump-start the economy”!!!
The three concluding exclamation points were added by me, as a clever and clearly dramatic emphasis, to make sure that you completely understood that millions of consumers suddenly spending lots of new, free cash will certainly make the economy go!! Wow! What a boom it would cause!
The most laughable part is when they said that giving people cash “wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.” Hahahaha!
I told you they were wrong about some things, and here are three at once, because, firstly, it certainly WOULD cause inflation, however you define “damaging”.
And, contrary to the laughable conclusion of the authors, nobody doubts that it would work! Nobody! Lots and lots of new money continually pouring into an economy would NOT make a boom? Hahahaha!
And the reason that no government has tried it is because it is Stupid Writ Large (SWL), as in “No government that tried giving away money to the population lasted long enough to write it down.”
The authors thought they were so smart to anticipate the Disagreeable Mogambo Naysayer (DMN) loudly objecting “Because terrifying inflation is guaranteed to ensue, you morons, and poor people would be more and more poor and starved, and they will all get testy about their kids crying from hunger, and they can’t stay warm in the winter, or get out of the rain, and everything goes downhill pretty fast when people are rioting in the streets, and pretty soon you can’t get a good pizza anywhere within miles.”
Instead of wincing and slinking away in shame at my cruel scorn, they write, hilariously, “Other critics warn that such helicopter drops could cause inflation. The transfers, however, would be a flexible tool. Central bankers could ramp them up whenever they saw fit and raise interest rates to offset any inflationary effects.” Hahahahahahaha!
Central bankers could give away more and more cash “whenever they saw fit,” and yet there will be some glorious time when the Fed sees “fit” to stop giving away money and thus cause an economic slowdown, risking asset-price deflation that is leveraged a 100-to-1? Hahahaha! As Monty Python would say, “Pull the other one!”
And raising interest rates to somehow sterilize a tsunami of cash? I care about interest rates when I am receiving more and more cash and price inflation is roaring?  Hahaha! I’m busting a gut here!
But jocularity and complete stupidity aside, somebody must be expecting some new income, as Chuck Butler of Everbank reports that “July Consumer Credit (read debt) grew by $26 Billion, and June’s number was revised upward to $18.8 Billion from $17.2 Billion. But, $26 Billion!”
He, as well as I, characterizes it as “off the charts folks, as if 2008 never happened! What the heck is going on around here? Doesn’t anyone ever learn lessons?”
Dave Gonigam of the 5-Minute Forecast parses it down to “Of that total, $5.4 billion came in credit cards — a surge previously unseen during the anemic ‘economic recovery’ these last five years.” 
“Of the remaining $20.6 billion, most of that was in auto loans, very little in student loans.”
So do these people suddenly have jobs, explaining their spending spree? No. In fact, ever fewer people have jobs.
And if you want some bad news on the employment front besides the usual upsetting stories about high unemployment and how jobs are disappearing faster than a pizza at a Super Bowl party, the booklet titled “Pocket World in Figures” from The Economist magazine, has a table titled “Largest Manufacturing Output” which puts the United States at the top of the list, at $1771 billion.
This puts us a measly $14 billion ahead of China, which is bad enough, but when you look at the next chart down the page, under “Largest Services Output”, the United States is again number one, at $10,574 billion, while the second place is held by Japan at a measly $3,904 billion, and China at a distant $3,172 billion.
In short, five times as many US workers are providing services as are employed manufacturing something.  Probably has something to do with explaining our $40 billion-per-month trade deficit! Hahaha!
But lamenting the gaping trade deficit aside, it is this terrifying kind of weird, economy-distorting “services” thing, and the bizarre thing about giving money away to people, that will almost certainly lead to new fiscal policy accommodating them both, since behavior that was once considered idiotic, suicidal desperation, is now the only way out.  Probably connected with a new war, if history is any guide.
And when the government starts doling out all that luscious cash, and calling it our patriotic duty to spend all this new cash, it’s party time! Par-tay!
And if this “give money directly to people” thing plays out even vaguely as proposed, then you will happily have some time left to accumulate lots of gold and silver during the Big Monetary Party (BMP) that will surely follow, and you will have some time to think and idly daydream of what their prices will be at the calamitously inflationary end of the aforementioned Big Monetary Party (BMP), when everything else is ashes and heartache. Astronomic!
Whee! This investing stuff is easy!
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Sep 03

Ponzi Population Dynamics

Gold Price Comments Off on Ponzi Population Dynamics
Social security schemes can’t work if population is shrinking…

PERHAPS one of the silliest myths around today, in my opinion, is the notion that a shrinking overall population naturally causes or leads to economic decline, writes Nathan Lewis at New World Economics.
This is gradually becoming more immediately relevant, as the fertility rate is below replacement on every continent except for Africa today.
It’s true that a larger population will have a higher total GDP, simply because you are counting more people. However, you can have a large population with a relatively low per-capita GDP (all of Africa, 1.1 billion), or a small population with a high per-capita GDP (New Zealand, 4.5 million). So, obviously, just piling people together doesn’t create wealth and personal abundance.
As most any economist should know, per-capita incomes – what we usually mean by “wealth” – are largely a factor of productivity. Of course this includes the productivity of the employed, but it also includes productivity within the household or in other nonmonetary realms – the real-life economy, not the “economy” of statistical abstraction.
Let’s take, for example, Japan. The country has had a lowish fertility rate (1.42 births per woman) for some time, although not all that much lower than Thailand (1.50) or Germany (1.43), and higher than Poland (1.33) and Hong Kong (1.17). However, someone has to be first in these matters, and it just happens to be Japan.
The population of Japan is estimated to have peaked in 2008 at 128,083,960 people, and was estimated for 2014 at 127,220,000. So, it declined an estimated 0.7% total over six years.
The total population is projected to fall to 95.2 million in 2050. Which is still a lot of people for a smallish island, without much flat land. It is roughly the population of 1960. New Zealand is actually only 29% smaller than Japan by land area, and almost the same size if you omit Japan’s sparsely-populated Hokkaido island. If New Zealanders can be reasonably prosperous on about the same size island with 4.5 million people, why can’t Japanese be prosperous with “only” 95 million people? Or 50 million, or ten million?
The picture gets a little more interesting when looking at the working-age population (15-64). It peaked at an estimated 86,908,333.3 in 1995 (sorry if I chuckle at estimates that go down to the partial-human), and had declined to an estimated 79,144,166.7 in March 2013. This is a total decline of 9% over eighteen years, or 0.53% per annum. The present rate of decline is about 1% per year in working-age population.
This is not a particularly fast rate of change. Why can’t those working-age people be productive and prosperous, and perhaps become more productive and prosperous? A 2-3% annual increase in real productivity is common in economic history, and in the best of times it can reach 5% or more. In other words, the variance between “high growth” and “stagnation” in the productivity of the working-age population is far more important than these modest trends in population.
At the same time, the population over 65 has been growing, as a percentage of total population. In 1989, 11.6% of the population was over 65; in 2006 it was 20%; and in 2055, it was estimated to climb to 38%. Unlike most wildly-incorrect economic projections, these demographic projections are likely to be fairly accurate.
This is a real issue, and a rather novel one. Care of elderly has been a part of human society from prehistory. However, most people died before 65, so there were never so many elderly.
But, I see no reason here why those who are in their productive years, 15-64, can’t be as productive as they are today, or more so. The fruits of production (in practical terms, income) will be used for whatever the highest-priority goal is, and care of elderly will probably rank high on that list.
We have two basic conclusions thus far: first, that working-age people can continue to be productive, or become more productive, no matter what the overall demographic trends are; and second, that there is a real demographic shift here which is somewhat new in all of human history. This will involve some challenges and changes, but the pace is actually rather slow, and an excellent solution can be found.
The main problems are, in my view, related to existing government policies and programs, which are based, overtly or implicitly, on expanding population. Basically, they are Ponzi schemes, which need to grow or die. This includes public pensions (“Social Security” in the U.S.), existing healthcare programs, and patterns of government debt and deficits. Many of these were conceived in the late 19th century, and expanded during the mid-20th century. They may have been appropriate for 1960 or 1970, but are not appropriate today.
For example, a pattern of continuous government deficits and growing total debt can be sustained for some time if nominal GDP is also growing quickly. The “debt dynamics” allow debt/GDP ratios to maintain some semblance of sustainability, at least until a politician’s term of office is ended. Alas, this continuous-growth Ponzi doesn’t work well in an environment of population shrinkage.
Today’s calls for increased immigration and so forth are, I find, mostly motivated by the urge to keep the Ponzi running and thus maintain the status quo. The solution is rather to establish an arrangement that is appropriate for demographic realities. Japan’s deficit and debt problems will be resolved either via currency depreciation or formal default. But, this is just a shuffling of paper. Who cares. In 1949, Japan’s government made it illegal to run a deficit or issue government bonds; this lasted until 1965. At that time, the existing debt had already been eliminated by postwar hyperinflation.
The Japanese government thus had no debt and no deficits. Perhaps such a time will come again. Perhaps it would be a very prosperous time, as the 1950s and 1960s were for Japan. Perhaps the working-age population would become more and more productive, and thus enjoy higher and higher real incomes, even though there happens to be slightly fewer of them each year.
Public pensions and healthcare are another system that worked fine in 1970, but aren’t working today. The total cost of both programs, plus other welfare-related programs, was 5.77% of National Income (similar to GDP) in 1970; in 2012 it was 31.34%. Obviously, the programs which worked fine in 1970 aren’t working today.
This just means you need some new solutions. Japan will eventually have new health and welfare-related arrangements of some sort. We know this because the existing ones will obviously perish at some point.
Unfortunately, the attempt to maintain these existing, inappropriate arrangements itself is leading to the impoverishment of working-age people, whose productivity is indeed the “economy” itself.
For example, taxes have been rising continuously. The recent increase in consumption taxes (national sales taxes) has gotten a lot of attention. However, one of the biggest taxes in Japan is what we would call a payroll tax on income. It was apparently 14.42% for companies in 2013, and 13.94% for individuals, for a total of 28.36%. And, there is no upper limit on income.
I don’t have good data on historical payroll tax rates in Japan, but as a percentage of National Income, the revenue from the tax was 5.4% in 1970, 13.6% in 2000, and 17.1% in 2012. The consumption tax did not exist in 1988; in 1989, it was introduced at 3%. It is scheduled to rise to 10% in 2015.
The secret to making people prosperous is what I call the Magic Formula. It is: Low Taxes, Stable Money. This is actually what Japan did in the 1950s and 1960s, as I documented in my book Gold: the Once and Future Money. The government is doing the opposite today, and getting the opposite result. This has nothing to do with demographics, but is the simple cause-and-effect of government policy.
If Japan is going to have another period of prosperity, with a graying population, the eventual solution will be the same: to make working-age people as productive as possible.
This means the Magic Formula, combined with other government policies that address the realities of our time, rather than relics of the past that should be abandoned before they cause any more problems.
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Aug 07

America’s Immature Recovery

Gold Price Comments Off on America’s Immature Recovery
Can the Yellen Fed dare take away the QE allowance just yet…?

The PRICE of OIL is dropping – even with the problems in Russia and Iraq, notes Bill Bonner in his Diary of a Rogue Economist.
This suggests the global economy is slowing. And in the US, the homebuilders are crashing…probably in anticipation of higher mortgage rates.
Janet Yellen is being pushed into a corner by the Fed’s own pronunciamientos. It has been threatening to raise interest rates when its inflation and employment targets are hit. And hit they have been. So what’s she gonna do?
Our guess is she means what she says. She is a smart woman. But she is not smart enough to see that she has been talking claptrap…and not courageous enough to admit that her career is built on it.
“People come to think what they must think when they must think it,” is one of our signature dicta.
To become a major establishment economist Janet Yellen had to think that well-meaning, well-educated officials could improve the performance of a market system.
She could be a monetarist…or a Keynesian. Different strains of thought were acceptable. But she had to be some type of activist. She had to be a True Believer in the power of intervention.
And as numero uno at the Fed, she must believe, too, that its policies have prevented a depression and have helped the economy recover.
As lunatic as it sounds, she now believes she guides the US economy, and indirectly, the entire economy of planet Earth, to a stability and growth that it could not achieve on its own.
A heavy responsibility, no doubt. She probably hedges it with the further belief that an economy – like a surly teenager – does not always cooperate. It doesn’t always do what it ought to do when it ought to do it.
Sometimes it even sulks…and often, it fails to get out of bed in the morning. So, if it doesn’t meet expectations, it’s not her fault!
Now, she must think she’s got things headed in the right direction. Her role is to make sure it doesn’t get off track.
If she sees any sign the “recovery” has been put in danger by her attempts to normalize interest rates…she will back up. That is the history of the last seven years of Fed policy…and it is probably the best guide to the months ahead.
Almost surely, the withdrawal of QE will be accompanied by anxiety and volatility. As economist Richard Duncan points out, the net liquidity that has been driving up asset prices, month after month, is now drying up. The financial world is used to getting a big allowance, with no strings attached. Take it away and there are bound to be tantrums.
Yellen will not panic at end-July’s 500-point drop in the Dow. But if the drops continue…and if new data show the recovery is not as mature as she had thought…she will back off. She will give in. The allowance will be reinstated.
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Jul 08

The Land of the Free

Gold Price Comments Off on The Land of the Free
But not free to avoid jail, hypocrisy or beaten-up interest rates…

LET’S HEAR it for Independence Day, writes Bill Bonner in his Diary of a Rogue Economist.
We licked the British at Yorktown, Virginia, with the help of the French fleet. Ever since, America has been the land of the free.
Free people. Free minds. Free markets.
But what’s this? Vicky Pelaez in El Diario La Prensa:
“There are approximately 2 million inmates in state, federal and private prisons throughout the country. According to California Prison Focus, ‘no other society in human history has imprisoned so many of its own citizens.’ The figures show that the United States has locked up more people than any other country: a half million more than China, which has a population five times greater than the US
“Statistics reveal that the United States holds 25% of the world’s prison population, but only 5% of the world’s people. From less than 300,000 inmates in 1972, the jail population grew to 2 million by the year 2000. In 1990 it was one million. Ten years ago there were only five private prisons in the country, with a population of 2,000 inmates; now, there are 100, with 62,000 inmates. It is expected that by the coming decade, the number will hit 360,000, according to reports.”
What has happened over the last 10 years? Why are there so many prisoners? More from Pelaez:
“The private contracting of prisoners for work fosters incentives to lock people up. Prisons depend on this income. Corporate stockholders who make money off prisoners’ work lobby for longer sentences, in order to expand their workforce.”
“The system feeds itself,” says a study by the Progressive Labor Party, which accuses the prison industry of being “an imitation of Nazi Germany with respect to forced slave labor and concentration camps.”
The prison industry complex is one of the fastest-growing industries in the United States and its investors are on Wall Street.
“This multimillion-Dollar industry has its own trade exhibitions, conventions, websites, and mail-order/Internet catalogs. It also has direct advertising campaigns, architecture companies, construction companies, investment houses on Wall Street, plumbing supply companies, food supply companies, armed security, and padded cells in a large variety of colors.”
We’re not going to let a little thing like forced labor spoil our Freedom Fest holiday.
Anyway, it is only poor people who get caught up in the prisons’ slave market. So, we have nothing to worry about. We can hire a shyster lawyer when we need one.
Besides, we like the Land of the Free. Which is to say, we appreciate hypocrisy. After all, it is the “homage that vice pays to virtue.” Without it, virtue wouldn’t get any strokes at all.
Free minds and free markets are virtues too. Nobody cares about them either. Not in America. We have the schools to shackle minds. And we have the feds to lock up, beat up, and tie up the markets
In this regard, we were particularly amused this week by Janet Yellen, America’s No.1 market jailer. The most important number in a free market is the price of capital…the cost of borrowing someone else’s savings: the interest rate. On it, almost all other numbers depend.
That number must be “discovered” in free trading. Otherwise, if it is chained up…and whipped, like a tortured prisoner, it is likely to tell you what you want to hear, not the truth.
This week, she gave us such a gaudy example of jailhouse humor that the gods must have fallen on the floor, holding their stomachs and hoping not to bust a gut laughing. Here’s Ms.Yellen:
“At this point, it should be clear that I think efforts to build resilience in the financial system are critical to minimizing the chance of financial instability and the potential damage from it. This focus on resilience differs from much of the public discussion, which often concerns whether some particular asset class is experiencing a “bubble” and whether policymakers should attempt to pop the bubble. Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.”
Resilience? By pushing down interest rates…and promising as much extra credit as the speculators need…she has turned the wild, robust markets of a free economy into the fragile crystal of a parlor ornament. And the system now depends on something so freakish that it can’t go on much longer – unlimited credit at zero cost.
Without this heavy-handed intervention, the whole kit and caboodle shatters into a thousand shards.
But wait. She is ready for it:
“Nonetheless, some macroprudential tools can be adjusted in a manner that may further enhance resilience as risks emerge.”
This from the woman who missed the biggest threat in many decades. Economist Robert Hall says the years since 2007 were “a macroeconomic disaster…of a magnitude unprecedented since the Great Depression.”
And now, so macro-reckless is Yellen’s combination of number torturing and policy improvisation that even her own banking cartel headquarters – the Bank of International Settlements (BIS) – had to say something:
Overall it is hard to avoid the sense of a puzzling disconnect between the market’s buoyancy and underlying economic developments globally…Financial markets are euphoric…and yet the macro and geopolitical outlook is still highly uncertain.
“Policy,” BIS continued, “has little room for maneuver.”
The BIS says there are $710 trillion in derivatives now outstanding. Combined public debt in the G7 economies has grown 40% since the crisis began. Corporate debt has never been higher…and never grown so fast. And now, consumer prices may now be going up.
All of this is the product of central planning and an unfree market. Instead of allowing the interest rate to frankly express itself, Ms. Yellen has put tape over its mouth.
What place will history give Ms. Yellen? We don’t know. But all up and down the yield curve, interest rates cringe, whimper and wet their pants when they hear her coming.
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Jul 02

Who Pays the Minimum Wage?

Gold Price Comments Off on Who Pays the Minimum Wage?
We don’t want no stinkin’ entry-level jobs. And other slurs on the jobless…

The MINIMUM wage should be the easiest issue to understand for the economically savvy, writes Doug French in the Daily Dispatch from Doug Casey’s research group.
If the government arbitrarily sets a floor for wages above that set by the market, jobs will be lost. Even the Congressional Budget Office admits that 500,000 jobs would be lost with a $10.10 federal minimum wage. Who knows how high the real number would be?
Yet here we go again with the “Raise the minimum wage” talk at a time when unemployment is still devastating much of the country. The number of Americans jobless for 27 weeks or more is still 3.37 million. And while that’s only half the 6.8 million that were long-term unemployed in 2010, most of the other half didn’t find work. Four-fifths of them just gave up.
So, good economics and better sense would say, “Make employment cheaper.” More of anything is demanded if the price goes down. That would mean lowering the minimum wage and undoing a number of cumbersome employment regulations that drive up the cost of jobs.
But then as H.L.Mencken reminded us years ago, “Nobody ever went broke underestimating the intelligence of the American public.” Which means the illogical case made by Republican multimillionaire businessman Ron Unz is being taken seriously.
Unz says the minimum should be $12 and recognizes that 90% of the resistance is that it would kill jobs. So what’s his answer to that silver bullet to his argument? America doesn’t want those low-paying jobs anyway. In his words:
“Critics of a rise in the minimum wage argue that jobs would be destroyed, and in some cases they are probably correct. But many of those threatened jobs are exactly the ones that should have no place in an affluent, developed society like the United States, which should not attempt to compete with Mexico or India in low-wage industries.”
He doesn’t think much of fast-food jobs either. But he knows that employment can’t be shipped overseas, so Mr.Unz’s plan for those jobs is as follows:
So long as federal law requires all competing businesses to raise wages in unison, much of this cost could be covered by a small one-time rise in prices. Since the working poor would see their annual incomes rise by 30 or 40%, they could easily afford to pay an extra dime for a McDonald’s hamburger, while such higher prices would be completely negligible to America’s more affluent elements.
He believes that if all jobs pay well enough, legal applicants will apply and take all the jobs. This is where Unz crosses paths with David Brat, the economics professor who recently unseated House Majority Leader Eric Cantor.
Brat claims to be a free-market sympathizer and says plenty of good things. However, in his stump speeches and interviews, Brat says early and often:
“An open border is both a national security threat and an economic threat that our country cannot ignore…Adding millions of workers to the labor market will force wages to fall and jobs to be lost.”
That would make sense if there were a fixed number of jobs, but that’s not the case. An economics professor should know that humans have unlimited wants and limited means, which, as Nicholas Freiling explains in The Freeman, “renders the amount of needed labor virtually endless – constrained only by the economy’s productive capacity (which, coincidentally, only grows as the supply of labor increases).”
An influx of illegal immigrants may or may not drive down wages, but even if it does, that’s a good thing. Low wages allow employers to invest in other things. More efficient production lowers costs for everyone, producers and consumers, allowing for capital creation. In the long run, it is capital investment that creates jobs.
Mr.Unz claims that low-wage employers are being subsidized by the welfare state. “It’s a classic case of where businesses manage to privatize the benefits of their workers – they get the work – and socialize the costs. They’ve shifted the costs over to the taxpayer and the government,” writes Unz.
It makes one wonder how the businessman made millions in the first place. Wage rates aren’t determined by what the employee’s expenses are.
“Labor is a scarce factor of production,” wrote economist Ludwig von Mises. “As such it is sold and bought on the market. The price paid for labor is included in the price allowed for the product or the services if the performer of the work is the seller of the product or the services.”
Mises explained that a general rate of wages does not exist.
“Labor is very different in quality, and each kind of labor renders specific services…each is appraised as a complementary factor for turning out definite consumers’ goods and services.”
Not every job contributes $12 an hour in production benefits toward a finished good or service. And many unskilled laborers can’t generate $12 an hour worth of output. The Congress that created the minimum wage knew this and carved out the 14(c) permit provision in the Fair Labor Standards Act of 1938, allowing an exemption from minimum wage requirements for businesses hiring the handicapped.
Congress included in the act this language:
“The Secretary, to the extent necessary to prevent curtailment of opportunities for employment, shall by regulation or order provide for the employment, under special certificates, of individuals…whose earning or productive capacity is impaired by age, physical or mental deficiency, or injury, at wages which are lower than the minimum wage.”
Entrepreneurs must purchase all factors of production at the lowest prices possible. No offense to labor – that’s what customers demand. All cuts in wages pass through to customers. If a business pays more than the market wage rate, the business “would be soon removed from his entrepreneurial position.” Pay less than the market, and employees leave to work somewhere else.
First, Unz says, “American businesses can certainly afford to provide better pay given that corporate profits have reached an all-time high while wages have fallen to their lowest share of national GDP in history.” So, instead of taxpayers supporting the poor, Unz wants business to pay. No, wait: later he writes that consumers will support the poor by paying higher prices.
“McDonald’s and fast-food places would probably have to raise their prices by 8 or 9%, something like that. Agricultural products that are American-grown would go up by less than 2% on the grocery shelves. And those sorts of price increases are so small that they would be almost unnoticed in most cases by the consumer.”
Walmart would cover a $12 minimum wage with a one-time price increase of 1.1%, he says, with the average Walmart shopper paying just an extra $12.50 a year. So it’s consumers – who are also taxpayers – who get to be their brother’s keeper either which way with Unz’s plan.
Fortune magazine writer Stephen Gandel appeared on Morning Joe last week, making the case that Walmart should give its employees a 50% raise (his article in Fortune on the subject appeared last November). According to him, the company is misallocating capital by not paying higher wages. He says investors are not giving the company credit for the lower pay in the stock price, so they should just do the right thing and pay their employees more.
But Walmart does pay more when it has to compete for employees. In oil-rich Williston, North Dakota, the retail giant is offering to pay entry-level workers as much as $17.40 per hour to attract employees.
Walmart isn’t alone. McDonald’s is paying $300 signing bonuses to attract workers. The night shift at gas stations in Williston pays $14 an hour.
By the way, whatever Walmart is paying, it must be enough, because it has plenty of applicants to choose from. In 2005, 11,000 people in the Bay Area applied for 400 positions at a new Oakland store. Three years later near Chicago, 25,000 people applied for 325 positions at a new store.
Last year a new Walmart opened in the DC area. Again, the response was overwhelming. Debbie Thomas told the Washington Post:
“It’s hard to live in this city on $7.45 or $8.25 an hour. I’ve lived here all my life, and I want to stay here. In the end, I’m just glad Wal-Mart’s here. I might get a job.”
Throughout history, people have had to relocate to find work. Today is no different.
In the long run, as the minimum wage increases, capital will be invested to replace labor. We’ve seen it for years. Machines don’t call in sick, sue for harassment, require health insurance, or show up late. Now patrons pour their own drinks. Shoppers scan their own groceries and pump their own gas. Soon we’ll be ordering from electronic tablets at our tables in sit-down restaurants to cut down on wait staff, and the cooks will be replaced by automated burger makers.
Unz may well believe what he proposes would be doing good; however, it means kids and the unskilled go unemployed and in the end, are unemployable.
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Jun 27

3 Question Marks for a New Bretton Woods

Gold Price Comments Off on 3 Question Marks for a New Bretton Woods
Paul Volcker helped end the gold-backed post-war system. Now he suggests reviving it…

SETH LIPSKY, editor of the storied New York Sun (a brand distinguished by the long residency of Henry Hazlitt), recently in the Wall Street Journal brought to wider attention certain remarkable recent comments by Paul Volcker, writes Ralph Benko at the Cobden Centre in an article first published at Forbes.com.
Volcker spoke before the May 21st annual meeting of the Bretton Woods Committee at the World Bank Headquarters in Washington, DC. Volcker’s remarks did not present a departure in substance from his long-standing pro-rule position. They nonetheless were striking, newly emphatic both by tone and context.
Volcker, asked by the conference organizer for his preferred topic, declared that he had said:
“What About a New Bretton Woods??? – with three question marks. The two words “Bretton Woods” still seem to invoke a certain nostalgia – memories of a more orderly, rule-based world of financial stability, and close cooperation among nations. Following the two disasters of the Great Depression and World War II that at least was the hope for the new International Monetary Fund, and the related World Bank, the GATT and the OECD.
No one here was actually present at Bretton Woods, but that was the world that I entered as a junior official in the US Treasury more than 50 years ago. Intellectually and operationally, the Bretton Woods ideals absolutely dominated Treasury thinking and policies. The recovery of trade, the opening of financial markets, and the lifting of controls on current accounts led in the 1950’s and 60’s to sustained growth and stability.
The importance, especially from a speaker of Volcker’s stature presenting among the current heads of the two leading Bretton Woods institutions, the IMF’s Christine Lagarde, and the World Bank Group’s Jim Yong Kim, among other luminaries, potentially has radical implications. Volcker provided a quick and precise summary of the monetary and financial anarchy which succeeded his dutiful dismantling of Bretton Woods:
Efforts to reconstruct the Bretton Woods system, either partially at the Smithsonian or more completely in the subsequent negotiations of the Committee of 20, ultimately failed. The practical consequence, and to many the ideological victory, was a regime of floating exchange rates. Somehow, the intellectual and convenient political argument went, differences among national financial and economic policies, shifts in competitiveness and in inflation rates, all could be and would be smoothly accommodated by orderly movements in exchange rates.
How’s that working out for us? Volcker played an instrumental role in dutifully midwifing, as Treasury undersecretary for monetary affairs under the direction of Treasury Secretary John Connally, the “temporary” closing of the gold window announced to the world on August 15, 1971 by President Nixon. Volcker now unequivocally indicts the monetary regime he played a key role in helping to foster.
By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth.
The United States, in particular, had in the 1970’s an unhappy decade of inflation ending in stagflation. The major Latin American debt crisis followed in the 1980’s. There was a serious banking crisis late in that decade, followed by a new Mexican crisis, and then the really big and damaging Asian crisis. Less than a decade later, it was capped by the financial crisis of the 2007-2009 period and the great Recession. Not a pretty picture.
Volcker fully recognizes the difficulties in restoring a rule-based well functioning system both in his speech and in this private comment to Lipsky made thereafter. Lipsky: “It’s easy to say what’s wrong,” Mr. Volcker told me over the weekend, “but sensible reforms are a pretty tough thing.”
The devil, of course, is in the details. What rule should prevail? There is an almost superstitious truculence on the part of world monetary elites to consider the restoration of the Gold Standard. And yet, the Bank of England published a rigorous and influential study in December 2011, Financial Stability Paper No. 13, Reform of the International Monetary and Financial System. This paper contrasts the empirical track record of the fiduciary Dollar standard directed by Secretary Connally and brought into being (and then later administered by) Volcker. It determines that the fiduciary Dollar standard has significantly underperformed both the Bretton Woods gold exchange standard and the classical Gold Standard in every major category.
As summarized by Forbes.com contributor Charles Kadlec, the Bank of England found that…
  • When compared to the Bretton Woods system, in which countries defined their currencies by a fixed rate of exchange to the Dollar, and the US in turn defined the Dollar as 1/35 th of an ounce of gold:
  • Economic growth is a full percentage point slower, with an average annual increase in real per-capita GDP of only 1.8%
  • World inflation of 4.8% a year is 1.5 percentage point higher;
  • Downturns for the median countries have more than tripled to 13% of the total period;
  • The number of banking crises per year has soared to 2.6 per year, compared to only one every ten years under Bretton Woods.
That said, the Bank of England paper resolves by calling for a rules-based system, without specifying which rule. Volcker himself presents as oddly reticent about considering the restoration of the “golden rule.” Yet, as recently referenced in this column, in his Foreword to Marjorie Deane and Robert Pringle’s The Central Banks (Hamish Hamilton, 1994) he wrote:
It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century Gold Standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.
There is an active dispute in Washington between Republicans, who predominantly favor a rule-based monetary policy, and Democrats, who predominantly favor a discretion-based monetary policy. The Republicans have not specified the rule they wish to be implemented. The specifics matter.
There is an abundance of purely empirical evidence for the Gold Standard’s effectiveness in creating a climate of equitable prosperity. The monetary elites still flinch at discussion the gold option. That said, the slow but sure rehabilitation of the legitimacy of the Gold Standard as a policy option was put into play by one of their own, no less than the then World Bank Group president Robert Zoellick, in a Financial Times op-ed, ‘The G20 must look beyond Bretton Woods’. There he observed, in part, that “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”
There are many eminent and respectable elite proponents of the Gold Standard. Foremost among these Reagan Gold Commissioners Lewis E. Lehrman (with whose Institute this writer has a professional association) and Ron Paul, and Forbes Media CEO Steve Forbes, coauthor of a formidable new book, Money, among them. There are many more, too many to list here.
In the penultimate paragraph of his remarks to the Bretton Woods Committee Volcker observes:
“Walter Bagehot long ago set out succinctly a lesson from experience: ‘Money will not manage itself.’ He then spoke from the platform of the Economist to the Bank of England. Today it is our mutual interdependence that requires a degree of cooperation and coordination that too often has been lacking on an international scale.”
As the great Walter Layton, editor of The Economist, wrote in 1925, “the choice which presents itself is not one between a theoretical standard on the one hand and gold with all its imperfections on the other, but between the Gold Standard…and no control at all.” “No control at all” anticipates Volcker’s own critique.
If Chairman Volcker overcame his aversion to considering the Gold Standard as a respectable option for consideration he just might find that his his stated concern “We are long ways from (a new Bretton Woods conference)” may be exaggerated. A golden age of equitable prosperity and financial stability is closer than Mr. Volcker believes.
The corollary to Volcker’s dictum, “ultimately the power to create is the power to destroy” is that the power to destroy is the power to create. It is time, and past time, Mr. Volcker, to give full and respectful consideration to the Gold Standard which served the world very well indeed and would serve well again.
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Jun 24

Economists, Poets & Gold

Gold Price Comments Off on Economists, Poets & Gold
Don’t expect to get paid. Do avoid blaming gold for the Depression…

I’VE NOTED before a rather strange oddity, writes Nathan Lewis at New World Economics.
Most self-proclaimed “gold standard advocates” actually label the monetary arrangements of the 1925-1931 period a major cause of the Great Depression. Yet the Keynesian Mercantilists generally do not.
The Keynesians claim an “inherent instability of capitalism” that requires government oversight and intervention, including funny-money currency manipulation by an unelected board of central bank bureaucrats. A gold standard system prevents this. But, the Keynesian Mercantilists generally do not lay blame on the gold standard system itself.
Why is this so? Alas, economics is a field of study heavily polluted by politics. One or another “explanation” for some past event is typically a justification for present and future policy. This has been as true of the Classical, right-leaning economists as it has been for the Mercantilist, left-leaning economists.
Why bring this up now?
I think we are naturally trending towards the replacement of today’s Mercantilist funny-money arrangement with a Classical hard-money system, which in practice means one based on gold. Probably, this will be accomplished with Russian, Chinese and perhaps German leadership, along with the participation of a number of allied states ranging from Iran to Brazil.
Unfortunately, there is still quite a lot of intellectual detritus to clear away, in my opinion, to best facilitate this political trend toward its natural conclusion. In other words: someone, somewhere, actually has to know what they are doing.
Here are some hypotheses for why the “gold guys” became their own worst enemies – actually inventing a series of rather fanciful arguments why the existing gold standard arrangements of 1925-1931 didn’t work, and in fact helped cause one of the biggest economic dislocations of the past two hundred years!
First, they don’t like “central banks”. What we call “central banks” today generally emerged in the latter 19th century worldwide, patterned on the model of the Bank of England. These were currency monopolies, in contrast to the distributed system used by the United States, which had a long history of opposition to currency monopoly. Alas, even the US succumbed to the trend toward currency monopoly, enacting the Federal Reserve Act in 1913, under rather curious circumstances. The Federal Reserve became active in the 1920s, although the US still used a competitive currency environment via the National Bank System, which remained viable until the late 1930s. Although the Federal Reserve certainly is to blame for a great many things, especially after 1965 or so, actually I find that it (and other central banks worldwide) adhered to gold standard principles rather closely in the 1920s and 1930s. The devaluation of 1933 was entirely due to executive order, and did not involve the Federal Reserve directly.
They don’t like the “gold exchange standard”. The “gold exchange standard” is a needlessly obscure term that simply refers to a currency board-like arrangement that targets a major international “reserve currency”, also based on gold, rather than having a direct link to gold bullion itself.
In practice, these things tend to blur a bit, as many central banks had a somewhat loose operating procedure that included both transactions in bullion and also in foreign gold-linked currencies, and held both bullion and foreign government bonds as reserve assets. In any case, the “gold exchange standard” – when operated correctly – is little more than a currency board, which we use today with no particular problems, and which had been used in the late 19th century as well.
However, a “gold exchange standard” does have an inherent weakness – it is somewhat dependent on the quality of the reserve currency, in practice either the British Pound or US Dollar. If the pound or Dollar was itself devalued (as indeed happened in 1931 and 1933), this would tend to put at risk all subsidiary currencies linked to these “reserve currencies.” This indeed happened in the 1930s, and again in the 1970s.
Also, “gold exchange standards” often do not have a direct provision for “convertibility”, or the requirement that the currency issuer (central bank) trade banknotes for bullion, and vice versa, on demand. Although this is not a requirement for a properly functioning gold standard system, the historical record shows that the absence of such a requirement often leads fairly quickly to an erosion of the system itself due to what amounts to political corruption. In practice, the requirement to deliver a reliable international reserve currency (such as British Pounds) on demand has served much the same purpose, but many think gold bullion redeemability would be much better.
Unfortunately, these worthy criticisms of reserve-currency currency-board-type systems tend to motivate the blaming of “gold exchange standards” for a wide variety of things that they really have nothing to do with.
They are inordinately attached to monetary explanations for everything. You have probably heard of the “Austrian explanation of the business cycle”. It is based entirely on funny-money manipulation by central banks. By itself, there’s nothing in particular wrong with it, and indeed variants of this pattern do occur. However, plenty of other things happen in economies also, and the self-proclaimed “Austrians” are forever trying to pound their square peg into round, triangular, and star-shaped holes. The formative experience of the actual used-to-live-in-Austria “Austrians” was of course the Austrian hyperinflation of the early 1920s, which was much like the better-documented German hyperinflation of the same time period, but which preceded the German example by about six months. So, there’s a reason for this intense focus on monetary affairs, and the consequent exclusion of everything else.
They have a blind spot for fiscal policy, in particular tax policy. Over a thousand US economists expressed the belief that the US’s Smoot-Hawley Tariff, and the consequent worldwide trade war as many governments passed retaliatory tariffs worldwide, would lead to an economic downturn. The House passed the bill in May 1929, and the Senate in March 1930. President Hoover signed the bill into law in June 1930. Some historians have identified September 1929 as the moment when the Senate moved from a majority in opposition to a majority in favor, which was accomplished by a radical expansion of the tariff to include many Senators’ home-state industries.
As the worldwide trade war ignited, trade and economies predictably sagged. It was exactly as those thousand-plus economists said would happen. Yet, oddly, nobody wants to lay blame on this as the initial instigator (but not the only or even primary cause) of the Great Depression, and would rather instead make up monetary fantasies.
This “blind spot” for influences such as tariff or tax policy in fact goes back several decades in the Classical tradition. If you read central texts such as Alfred Marshall’s Principles of Economics of 1890, or Ludwig Von Mises’ Human Action of 1949, there is hardly any discussion at all of tax policy.
They don’t want to accept the “capitalism is inherently unstable” arguments of the Keynesian-Mercantilists. Once you decide that capitalism is-in principle-inherently unstable, you are immediately drawn to the big-government funny-money arguments that the Keynesian-Mercantilists so enthusiastically embrace. In practice, “capitalism” (a convenient word for present arrangements) is in fact “unstable”, and does lead to things like the Great Depression or today’s crony-fascist debt bubble. However, I personally agree that capitalism in principle does work, and doesn’t just blow up for no reason at all.
Most big problems in “capitalism” (ie, real life) are due to big mistakes – huge deviations from the principles of capitalism. Like a worldwide tariff war. You can’t get much more obvious. Even a thousand economists (no smarter then than today) could see it. However, due to the “blind spot” regarding all forms of government intervention and influence besides monetary affairs, the Classical economists were pressed to explain the Great Depression as some kind of deviation from the proper Classical monetary principles. In other words, it was another attempt to get the square peg to fit into a non-square hole.
Bizarrely, because they already signed on to the “capitalism is inherently unstable” argument, the Keynesian-Mercantilists, despite being lifelong haters of Classical gold-based monetary systems, did not have a motivation to blame the monetary arrangements of the time. So, they didn’t. They hated that the “golden fetters” prevented the swift application of their funny-money solutions. They had to wait all the way until September 1931, when devaluation by Britain set off a chain of similar devaluations worldwide. It didn’t work particularly well, and even Keynes himself signed on to the Bretton Woods Agreement of 1944, which put the world gold standard system back together.
They wanted to remain friendly with their political allies, who were making a big mess of things. The modern Republican party has long had a tension between the “austerity wing” which often recommends tax rate increases as a way to deal with deficits, and the “growth and opportunity wing,” which often recommends tax rate reductions as a way to allow a healthier economy, which is-in practical terms-necessary for effective deficit reduction in any case. Both of these can come into conflict with the “protectionist/cartelist wing,” which has recommended protectionist tariffs since pre-Civil War days.
In the 1929-1932 period, the “growth and opportunity wing,” as represented by Treasury Secretary Andrew Mellon, was brushed aside, and the Republican/conservative/Classical political block was dominated by the “austerity wing” and the “protectionist/cartelist wing.” Mellon himself was marginalized by Hoover, who had acquiesced to the “protectionist-cartelist” wing by passing the Smoot-Hawley Tariff (which Hoover originally opposed). Mellon resigned in February 1932. Hoover then immediately crumbled before the “austerity wing” of the Republican Party, passing the Revenue Act of 1932, which included an explosion of personal and corporate income taxes, and a barrage of excise taxes (in effect, a sales tax).
Being an economist is like being a poet: you shouldn’t expect to get paid. Those who do seek remuneration (even in academia) are inevitably drawn toward one or another existing political bloc, where, if they expect to keep getting paid, they inevitably start making justifications for what the politicians wanted to do anyway. Even Andrew Mellon couldn’t keep his job, in opposition to the “austerity and protectionism” Republicans of that time. The message was clear-in the US, and also in other countries, which had much the same pattern. Thus, the Classical-leaning economists knew very well that there was no sinecure available for them if they were going to oppose the “austerity and protectionism” measures of the political conservatives of that time. (The political liberals all wanted big-government Keynesian-Mercantilists, and had no interest in Classical-leaning economists.)
Remember, it was the Great Depression. Nobody wanted to lose their job.
The “growth and opportunity wing” had a brief resurgence after WWII, but this was quashed by Eisenhower. Except for that, the Republican Party was dominated by the austerity-protectionist wings from 1929 to 1975. The Republican Party “growth and opportunity wing” didn’t make a comeback until Jack Kemp and Dick Armey led the tax-cutting Reagan Revolution beginning in 1975. Coincidentally (or not), this was also when Classical-leaning economists also began taking a closer look at the role of government fiscal and other policy in the Great Depression, abandoning the intense fixation on monetary explanations that dominated the 1950s and 1960s.
The “conservative funny money” idea turned into a big seller. The Classical ideals and principles of capitalism made a big recovery after World War II, but in a mutated and contorted form. All the small-government laissez-faire principles returned, but with one big exception: the introduction of a funny-money fiat currency element. This was exemplified most of all by Milton Friedman, whose “monetarism” is just a slightly different flavor of Mercantilist funny-money manipulation. Milton Friedman was a lifelong enemy of Classical monetary principles, including gold-based money. Friedman also blamed Fed negligence for the Great Depression, making essentially no mention of the catastrophic errors by the conservative “austerity wing” and “protectionist/cartelist wing” of that time, or later for that matter.
This was a big seller. Friedman was popular. He reached the highest levels of recognition and influence in the world of economic policy, despite being something of a ding-dong if you ask me. Those who wanted to make a living selling their economic poetry noticed.
Contrast Friedman’s professional success to the career of Ludwig Von Mises, who is acknowledged as one of the greatest economists of the twentieth century even by those who don’t agree with him. Mises couldn’t even get a regular job. He spent his postwar career (1945-1969) as a visiting professor at New York University, an unsalaried position that was funded by a friendly private businessman. He was, like Andrew Mellon, unemployable. Fifty years from now, I think Mises will still be recognized as one of the twentieth century’s greats, and Friedman will be considered just another Mercantilist nincompoop of the sort popular during that dark period. But, Friedman got paid, and Mises did not.
These things are understood at a subconscious, even limbic level by the vast majority of economic writers. They internalize it, churning out volumes of whatever happens to be politically expedient at the time, all the while remaining True Believers in everything they write. (It becomes difficult if you are not a True Believer, and the pay isn’t sufficient to tell lies all day.) This is simply the expected behavior of monkeys with an oversized brain, and has little to do with historical truth.
Thus, my personal conclusion is that the Keynesian-Mercantilist writers mostly have it right: there was no particular problem with the gold-based monetary system of the latter 1920s or early 1930s.
If we are going to properly rebuild a world monetary system along Classical lines in the future, it might help if others also took a fresh look at these issues.
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Jun 17

Gold, Global Interest Rates & the Fed Funds Cycle

Gold Price Comments Off on Gold, Global Interest Rates & the Fed Funds Cycle
US interest-rate phases move gold prices. So does the E7 of emerging economies…

WE RECENTLY welcomed Doug Peta, an economist from BCA research, to our offices, writes Frank Holmes, CEO and chief investment officer at US Global Investors.
He presented some interesting research regarding the Fed Funds Rate Cycle, and in turn, what that research could mean for gold. I wanted to share points from his presentation, as well as our own in-house research, to help you understand the positivity we see for the precious metal looking towards 2015.
Where are we now? Below is a chart from BCA showing the Fed Funds Rate Cycle. In essence, this chart neatly illustrates what the interest rate cycle imposed by the US Federal Reserve looks like. The red circle indicates where we are right now: Phase IV, also known as the “easing” phase of the monetary policy that was enacted in 2008 in the US, better known as quantitative easing (QE).
As we know, the Fed enacted QE to stimulate our nation’s economy. Right now we’re benefitting from our placement in Phase IV of this cycle because it is in this phase that the Fed is able to keep interest rates low, keep reserve requirements low and continue printing money. Similarly, when money is “easy”, businesses can find funding for projects and consumers have easier access to credit.
Historically, Phase IV (as well as the shift towards Phase I) are the best for equity investors because stocks usually rise during these two positions in the cycle.
We have been in Phase IV of the Fed Funds Rate Cycle for a few years now, and are expected to remain here into 2015. Eventually the Fed will have to start tightening again and raise rates, although the numbers should remain relatively low for a while. Once this begins, we will move into Phase I.
When it comes to the performance of gold and gold stocks, history indicates good times are ahead based on where we are in the cycle. Take a look at the tables below showing median returns during the cycle dating back to 1970 and 1971. You’ll see that for gold and gold stocks, Phase IV and Phase I both show the highest median returns.
The reason for the high returns during these two phases is because of “easy money.” Tight money, which is what Phase II and III are based upon, is typically bad for gold investors. When money is tight, we don’t have inflation, and investors don’t need to turn to gold as a hedge against inflation. Without inflation there is no need to hedge.
Another reason we’ve traditionally seen gold investors benefitting during Phases IV and I of the cycle is that when money is easy, interest rates are low, meaning less opportunity cost for holding the precious metal. To help illustrate, imagine putting your money in a savings account and earning 5% on it. Well, the opportunity cost of keeping gold under your mattress would be giving up that 5% that you could be earning elsewhere. When your savings account yields next to nothing, some reason, why not just buy some gold?
This pattern is worldwide; the trends we see in the Fed Funds Rate Cycle are not only US specific. This same idea carries through to the stimulative policies of the European Central Bank and Japan. More countries around the world are applying monetary stimulus programs much like the US, while moving away from more restrictive policies.
Remember, restrictive policies relate to tightening, which is bad for gold prices, and stimulative policies relate to easing, which is good for gold.
Right now, gold could use a pick-me-up, and here’s why. Over the last several years we’ve seen slowing money supply growth in many E7 countries. E7 refers to seven countries with emerging economies including China, India, Brazil, Mexico, Russia, Indonesia and Turkey. It’s these countries that drive the Love Trade for gold, primarily China and India, which purchase the metal for religious and cultural celebrations.
With less money being spent or borrowed, not only did the Love Trade begin to slow, global GDP growth also began to slow as you can see below.
The good news is, as we see various countries applying monetary stimulus, including emerging markets, we can expect this to contribute to global GDP growth. In 2014, global GDP is expected to grow by 3.2%, according to the World Bank’s latest projections.
Similarly, the money supply of the United States has been a steady grower and the money supply in the E7 countries is also expected to reverse course; right now it is growing again but at a slower rate. The US data suggests that a new easing cycle is starting in Europe, Japan and emerging markets.  A pickup in economic activity in the E7, especially the big gold consumers, is yet another positive sign for the yellow metal.
Real interest rates are headed lower for most of the world as well. As money supply grows, countries eventually feel inflationary pressures. This will hold true in the US as we move into 2015 and back into Phase I. All of these changes can lead to a declining confidence in paper money, yet another good sign for gold.
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Jun 17

Betting Against the Euro

Gold Price Comments Off on Betting Against the Euro
The ECB’s Mario Draghi has made his plans plain…

“THEY are going to trash the Euro,” economist Gary Shilling said a couple weeks ago, writes Steve Sjuggerud in his Daily Wealth email.
I agree with him.
Shilling is the only economist on Wall Street to have correctly predicted lower interest rates – for decades. He is certainly one of Wall Street’s most independent thinkers. And he and I agree on the Euro.
Specifically, Shilling said:
“Mario Draghi, the head of the European Central Bank, came out and said what I was predicting, that they are going to trash the Euro because they see it as a promoter of deflation, of which they are scared stiff.”
The fastest and easiest way for Draghi to jumpstart Europe’s economy would be to “trash the Euro” as Shilling said.
Draghi needs to act fast. So he has taken pages out of former US Federal Reserve chairman Ben Bernanke’s playbook. Several years ago, Bernanke put unprecedented economic stimulus measures in place in the US – cutting interest rates to zero and printing money. This caused stock prices (and other assets like real estate) in the US to soar higher than anyone could imagine, and it appears that the US is on solid footing.
Draghi is hoping for the same. He has cut interest rates below zero, stocks are up, and he hopes the economy will recover, too.
Draghi’s plan is to “trash the Euro.” We will take what he’s giving. We think it’s time to bet on a lower Euro.
Fortunately, we have everything that we want to see in place today.
We saw a similar set-up in 2009. In late 2009, the Euro had been soaring. And traders were betting heavily on a higher Euro. So in my True Wealth newsletter in 2009, we bet against the Euro – we bought shares of the ProShares UltraShort Euro ETF (NYSEARCA:EUO). Subscribers pocketed a 31% gain in six months, when we sold.
Fast forward to one month ago, and the setup conditions look the same as they were in 2009. Draghi’s back was against the wall. He needed to weaken the Euro. (Central bankers might not be good for much… but one thing they can do is weaken a currency if they set their minds to it!)
So in last month’s issue of True Wealth, we bet on Draghi trashing the Euro…we bet that what happened in 2009 will happen again…and we bought shares of EUO, again.
So far, so good. But Draghi is not done. So there are more gains to come, I believe.
As I write, we have an uptrend in EUO, because there’s a downtrend in the Euro. The fund is breaking out to highs not seen since early February of this year.
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