Oct 31

Solutions for Everything, Answers to Nothing

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Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Sep 28

The Bells, the Bells!

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From high art to Russia and US housing, the bells are ringing out…
 

TALK about ringing a bell! says Bill Bonner in his Diary of a Rogue Economist.
 
This ring-a-ding-ding comes from the New York Observer:
“Sales of contemporary art at public auctions surpassed $2 billion for the first time last year, the Paris-based arts-data organization Artprice said.
 
“The report tallied auction sales between July 2013 and July 2014, and it found that contemporary art sales grew 40% from the previous year. The number of big-ticket items that sold for over 10 million Euro ($12.8 million) more than doubled in the period.
 
“Those who follow the art market will remember the record-breaking Christie’s auction in November that saw buyers walk away with the most expensive publicly auctioned piece of art ever, Francis Bacon’s $142.4 million Three Studies of Lucian Freud (1969). That auction also minted Jeff Koons’ $58.4 million Balloon Dog (Orange) (1994-2000) as the most expensive piece by a living artist ever sold at auction…”
That’s another bad thing about being rich – you have to live with this stuff.
 
Even if you don’t own it, your new friends and neighbors will.
 
Unless you’re autistic – or a savant, like Warren Buffett – you’ll find it hard to avoid. Contemporary art and big, expensive houses are hugely popular among the wealthy elite. And most people are very susceptible to peer influence.
 
That is what creates investment opportunities, too. The lumpen investoriat – like the lumpen electorate – does not do much serious thinking.
 
Instead, it reacts emotionally and primitively.
 
It takes up positions that are too expensive. And then, in a panic, it stampedes away from them…leaving them too cheap. That’s when the bells start ringing.
 
Monday’s Financial Times, for example, chimed loudly.
 
It reported on page one that US private equity group Blackstone “calls it a day in Russia.”
 
This followed a withdrawal from Russia earlier this month by DMC Partners, a private equity group founded by former Goldman Sachs executives.
 
Further reporting revealed that the European Bank for Reconstruction and Development had “also suspended investments in the country.” And if that weren’t enough, “US group Carlyle has retreated from the market twice.”
 
Over on page 15, the FT continues to ring the bell, telling us that “Russia’s Gazprom could lose 18% of its revenues as a result of competition from US liquefied natural gas exports.”
 
On Tuesday, the bell ringing went on. A front page revealed that even the Rockefeller fortune was pulling out of fossil fuels.
“The effort to make oil, gas and coal investments as unpopular as tobacco stocks…gathered momentum…” the paper declared.
Geez, you’d have to be crazy to invest in Russian energy stocks now, right?
 
Yeah…crazy like a fox. Any time the newspapers give you nothing but reasons to sell, it’s time to buy. You can buy Gazprom for less than three times earnings…with a 5% dividend yield.
 
“And that’s post-theft,” says Rob Marstrand, chief investment strategist at our family wealth advisory, Bonner & Partners Family Office.
“You don’t have to worry about corruption…or politics…or sanctions,” he says. “It’s all in the price already.”
The news about Russian energy companies is all bad. It’s time to buy.
 
Meanwhile, what are people almost universally in favor of buying?
 
A house!
 
Poor people buy cheap houses. And when they get more money, they believe they should “trade up” to an expensive one.
 
Both rich and poor:
  • take advantage of mortgage deductions…
  • lock in low interest rates for the long term…
  • build equity…
  • improve their credit scores.
All by buying a house. But is it true? Is housing a good deal? Now? Ever?
 
A year ago, housing was one of our favorite investments. But our lead researcher at The Bill Bonner Letter, EB Tucker, thinks he hears the bell ringing for housing too.
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Jun 27

3 Question Marks for a New Bretton Woods

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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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May 15

M.Rentier & M.Charlatan

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Maybe the FT‘s star columnist doesn’t really believe his position either…
 

The OXFORD ENGLISH DICTIONARY defines rentier simply as “One who makes an income from property or investment,” writes Tim Price on his blog, The Price of Everything.
 
We must suspect that Martin Wolf has a somewhat more morally judgmental definition, as befits someone who does a passable impression of being a confused Marxist.
“Low interest rates are certainly unpopular, particularly with cautious rentiers. But cautious rentiers no longer serve a useful economic purpose. What is needed instead are genuinely risk-taking investors. In their absence, governments need to use their balance sheets to build productive assets. There is little sign that they will. If so, central banks will be driven towards cheap money. Get used to it: this will endure.”  – Martin Wolf, ‘Wipe out rentiers with cheap money‘, Financial Times, 6 May 2014
In any event, his recommendation that rentiers should be ethnically cleansed from the economy was not met with universal acclamation by FT readers. Here are some of the fruitier reader responses:
“The FT at its worst, from the stable of big brains and small minds. Summary – stuff all savers and pensioners; reward stupid and feckless borrowers, especially governments. MW misses the essential point that if savers are paid even modest interest rates they will have money to spend which unlike the feckless they deserve and are likely to spend wisely. This spending will boost consumption and investment in the economy, instead of being used to support lost causes and fools.” 
 
“All you have to offer the world is more of the same unsustainable credit booms ! You and your profession failed before the crisis and do so now.” 
 
“This is a frightening and surreal article from a failure in an utterly discredited profession. Shameful.” 
 
“This is why economics as a subject at university must be abandoned…there is just no point to its study.” 
 
“I’ll be sure to tell my grandparents they need to become ‘genuinely risk-taking investors’.”
 
“Blow it all up with cheap money. Perfect strategy, perfect execution. Bravo!”
 
“Thank you so much for reducing the endeavour and purpose of my entire life to nought, with one casual phrase. Those who have worked hard all their lives and saved do have feelings, even if despised by you.”
 
“So Wolf wants to reduce pensioners to abject poverty unless they take equity risk. Does the FT offer a defined benefits scheme?”
 
“I often think MW inhabits a different universe from me. One in which the Soviet Union had never existed. Where the Japanese hadn’t blown 100% of GDP or more on government-sponsored infrastructure. Where the Chinese hadn’t spent the last six years specifically following the hackneyed Keynesian prescriptions of Wolf and the IMF and astonishingly now found itself with a colossal Pandora’s box of insolvencies…”
 
“The rentiers in this system are those feeding off QE – not those trying to squeak a living on savings.” 
 
“It appears that what the readers have to endure and get used to is the stuck record Martin Wolf droning on and on about increased government spending being the solution to everything, no matter what the question being asked.” 
 
“As usual Mr Socialist you have no clue. I love reading you just to know the depth of the bankruptcy of the intelligentsia.” 
 
“You, Mr Wolf, are a disgrace and may I say a Quisling hiding in the propaganda press. This is no longer a free press, it does the bidding of its masters in the corporate world who own you.” 
 
“I called Martin Wolf a socialist in a comment last week and was firmly put back in my box by Mr.Wolf when he called me ‘a misguided human being’. The tone of the comment was pretty unpleasant (because he disagreed with my point of view). But the views/suggestions he puts across do to me seem of a socialist bent rather than a capitalist one, in that I don’t read him supporting ideas such as reduced taxes, reduced government, reduced government borrowing, reduced taxes, reduced red tape, reduced governmental interference in fact he seems to propound more of these which to me is socialism but heh ho I may be wrong:-) but if he is a capitalist I do wish he would use his position to support us!” 
 
“It is time for Mr.Wolf to retire. You are proposing disincentives for accumulating capital. Money printing is not capital and since when is it the government’s right and obligation to tell us what to do with our money? Neo liberal economic policy is left wanting after 6 years of experimentation and now you propose something more radical? Let markets decide where capital should go. Your proposal is dangerous and foolhardy.”
 
“It never ceases to surprise me that people who utter these things are allowed to work in the finance industry. If you were a bridge engineer your bridge would have fallen and your licence for ever revoked…luckily you are an economist (socialist/communist) so with a bit of luck you will be nominated for a Nobel prize.”
 
“But why let facts get in the way of a tired, 3rd rate article? Having said that I have trouble believing even MW believes this garbage, so presumably it’s all just click-bait…”
 
“When you say ‘cautious rentiers’ are not serving any economic purpose, I think you are saying that after a financial crisis caused by individuals, banks and governments who over-leveraged themselves and brought on 5 years (and counting…) of financial repression, there is a long way to go to economic recovery and the debtors of this world deserve a still longer break so that they can sort themselves out at the expense of creditors. Oh, and please could the people who stayed sane and sensible please put a bit more risk on while you’re at it?”
 
“Please – do not use ‘rentier’ as a substitute for ‘saver’. I have not come across a good definition of ‘rentier’ yet – if the word is to be used, it needs to be backed by a good definition and any definition will fall short unless it captures the idea that the rentier is earning returns which are somehow unearned. In the meantime, ‘cautious savers’ trying to make a return on money saved out of fully taxed employment income deserve better from the FT than suggestions that they should be ‘wiped out’.”
Economist Shaun Richards responded to Martin Wolf’s article with this eloquent rebuttal. Our own perspective is as follows.
 
Policy interest rates throughout the developed world are at all-time lows and must remain there for some time in order to reflate a broken banking system. Central banks are desperate to avoid true deflation since that would threaten the very existence of their grossly indebted client governments. Savers (the class of people we presume Martin Wolf refers to when he uses the disdainful term ‘rentiers’) are the blameless victims who must pay the price for unprecedented government and banking sector overspending.
 
Government is not the solution, it is the primary cause of the problem. And government does not create wealth, it merely redistributes it. The rational investor of today faces an almost insoluble dilemma: shelter in cash-type investments whose purchasing power is being eroded on a daily basis by explicit inflationism; or pursue returns from risk assets which have been inflated artificially higher on a bubble of monetary stimulus. We believe the rational response is to combine diversification (across asset classes that include hard assets) with concentration (on compelling deep value). 
 
‘Rentier’ is a word with French origins. Another word with French origins is ‘charlatan’.
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