Oct 29

QE, War & Other Autopilot US Action

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Ready for a clean break with Fed money creation…?

AMONG the many things still to be discovered is the effect of QE and ZIRP on the markets and the economy, writes Bill Bonner in his Diary of a Rogue Economist.
We can’t wait to find out.
The Fed has bought nearly $4 trillion of bonds over the last five years. You’re bound to get some kind of reaction to that kind of money.
But what?
Higher stocks? More GDP growth? Higher incomes? More inflation?
Washington was hoping for a little more of everything. But all we see are higher stock and bond prices. And if QE helped prices to go up, they should go back down when QE ends this week.
Unless the Fed changes its mind…
If the Fed makes a clean break with QE, it risks getting blamed for a big crack-up in the stock market. On the other hand, if it announces more QE, it risks creating an even bigger bubble…and getting blamed for that.
Our guess is we’ll get a mealymouthed announcement that leaves investors reassured…but uncertain. The Fed won’t allow a bear market in stocks, but investors won’t know how and when it will intervene next.
Last week, we were thinking about the reaction to the murder in Ottawa of a Canadian soldier who was guarding a war memorial.
There were 598 murders in Canada in 2011 (the most recent year we could find). As far as we know, not one registered the slightest interest in the US. But come a killer with Islam on his mind, and hardly a newspaper or talk show host in the 50 states can avoid comment.
“War in the streets of the West,” was how the Wall Street Journal put it; the newspaper wants a more muscular approach to the Middle East.
After a quarter of a century…and trillions of Dollars spent…and hundreds of thousands of Dollars lost…America appears to have more enemies in the Muslim world than ever before. Why would anyone want to continue on this barren path? To find out, we follow the money.
Professor Michael Glennon of Tufts University asks the same question: Why such eagerness for war?
People think that our government policies are determined by elected officials who carry out the nation’s will, as expressed at the ballot box. That is not the way it works.
Instead, it doesn’t really matter much what voters want. They get some traction on the emotional and symbolic issues – gay marriage, minimum wage and so forth.
But these issues don’t really matter much to the elites. What policies do matter are those that they can use to shift wealth from the people who earned it to themselves.
Glennon, a former legal counsel to the Senate Foreign Relations Committee, has come to the same conclusion. He says he was curious as to why President Obama would end up with almost precisely the same foreign policies as President George W. Bush.
“It hasn’t been a conscious decision. […] Members of Congress are generalists and need to defer to experts within the national security realm, as elsewhere.
“They are particularly concerned about being caught out on a limb having made a wrong judgment about national security and tend, therefore, to defer to experts, who tend to exaggerate threats. The courts similarly tend to defer to the expertise of the network that defines national security policy.
“The presidency is not a top-down institution, as many people in the public believe, headed by a president who gives orders and causes the bureaucracy to click its heels and salute. National security policy actually bubbles up from within the bureaucracy.
“Many of the more controversial policies, from the mining of Nicaragua’s harbors to the NSA surveillance program, originated within the bureaucracy. John Kerry was not exaggerating when he said that some of those programs are ‘on autopilot’.
“These particular bureaucracies don’t set truck widths or determine railroad freight rates. They make nerve-center security decisions that in a democracy can be irreversible, that can close down the marketplace of ideas, and can result in some very dire consequences.
“I think the American people are deluded…They believe that when they vote for a president or member of Congress or succeed in bringing a case before the courts, that policy is going to change. Now, there are many counter-examples in which these branches do affect policy, as Bagehot predicted there would be. But the larger picture is still true – policy by and large in the national security realm is made by the concealed institutions.”
Calling the Ottawa killing “war” not only belittles the real thing; it misses the point. There is no war on the streets of North America. But there is plenty of fraud and cupidity.
Here is how it works: The US security industry – the Pentagon, its hangers-on, its financiers and its suppliers – stomps around the Middle East, causing death and havoc in the Muslim world.
“Terrorists” naturally want to strike back at what they believe is the source of their sufferings: the US. Sooner or later, one of them is bound to make a go of it.
The typical voter hasn’t got time to analyze and understand the complex motives and confusing storyline behind the event. He sees only the evil deed.
His blood runs hot for protection and retaliation. When the call goes up for more intervention and more security spending, he is behind it all the way.
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Oct 24

Silver Buyers "Not Investing, But Stacking"

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Silver investing analyst “gets why people are buying”, forecasts record-high prices…

SILVER INVESTMENT demand has receded since 2011, according to a detailed new report, but it remains “the single most important driver of prices” and is set to return, perhaps with force, over the coming decade.
On “current trends”, says the new Silver Investment Demand report from US consultancy the CPM Group – commissioned by the Washington-based Silver Institute –  investors worldwide could grow their aggregate holdings by 50% between now and 2024.
This level of investing “would be expected to push annual average silver prices to a fresh record high further out,” says CPM Group’s managing director, Jeffrey Christian.
Relaying an overview of silver’s historical use as reliable money, notably in China for 400 hundred years to the mid-20th century – as well as across the United States before the 1913 foundation of the Federal Reserve – Christian recounts a modern silver investor’s comment to him regarding what many chatrooms call “stacking”.
“With due respect,” the investor said, “you need to know that we do not invest in silver. We stack it.”
What the comment means, says Christian, is that silver investors in the developed West – whose demand has surprised analysts and defied the metal’s 60% price-drop since 2011 – “[do] not see silver as an investment, but as a store of wealth, an alternative to holding one’s wealth in a nationally issued currency such as the US Dollar.”
Instead of viewing silver as a speculative or short-term investment, Christian goes on, these buyers see the metal “as a core part of their long-term assets, the base in some cases of the individual’s wealth…much more meaningful and visceral to the owners than shares in a stock or a series of bonds they may hold for a period of time.”
Weighing against the silver stackers, however, other more “short-term” investors have driven the metal’s sharp price falls since it hit near-all time highs in spring 2011, CPM Group’s Silver Investment Demand report explains.
So-called “trend followers”, as well as “opportunistic” traders switching into equities, have added to sales from disappointed investors who had “over-blown expectations” that the bull market of 2006-2011 would continue. And because net investing demand shows what CPM Group calls “a strong 59.1% correlation” with real silver prices (after accounting for inflation), this sell-off by shorter-term money drove the crash.
Ultimately, the report for The Silver Institute concludes, future net investment demand “can only be guessed [and] will depend on how investors view the world around them.” But investors “may begin to increase their net silver purchases in the years ahead.” Because with Western economies failing to redress their financial imbalances since the 2007-2012 crisis, the concerns over inflation and credit-default which “motivated” the surge in demand from 2006-2011 could soon return.
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Oct 23

An End to QE? A Good Man in Congress?

Gold Price Comments Off on An End to QE? A Good Man in Congress?
God knows what Ron Paul was ever doing in US politics…

OVER the weekend, we were down in Nashville at the Stansberry Conference Series event, along with Ron Paul, Porter Stansberry, Jim Rickards and others, writes Bill Bonner in his Diary of a Rogue Economist.
The question on the table: What’s ahead for the US?
Ron Paul took up the question from a geopolitical angle. He told the crowd that the military-security industry had Congress in its pocket.
As a result, we can expect more borrowing, more spending and more pointless and futile wars. They may be bad for the country and its citizens, says Paul, but they are good for the people who make fighter jets and combat fatigues.
“We’ve been at war in the Middle East for decades,” he said…
“We supported Osama bin Laden against the Soviets in Afghanistan…and the result of that was the creation of al-Qaeda.
“Then we supported Saddam Hussein against Iran. Saddam and bin Laden hated each other. But after 9/11 we attacked Saddam, using a bunch of lies to justify it. We sent over military equipment worth hundreds of billions of Dollars. This equipment is now in the hands of ISIS – another enemy we created…and a far more dangerous one.”
Ron Paul is such a pure-hearted soul. What was a man like him doing in Congress?
It must have been some sort of electoral accident. Good men rarely run for public office. And when they do, it is even rarer for them to win.
Poor Ron is retired from Congress now. And he spends his time trying to “get the word out.” He thinks that if people only realized what was happening they would vote for more responsible leaders and more sensible policies.
Alas, that’s not the way it works. The further the country goes in the wrong direction, the more people there are who have a financial interest in staying on the same road.
We visited Ron in his office on Capitol Hill. He held a breakfast meeting with a small group of congressmen, trying to convince them to vote his way; we don’t remember what was at issue.
It was an uphill battle. Only a few members of Congress attended. And those few worried that their districts would lose money…or that the labor unions wouldn’t like it if they voted no…or that they might not get a plum committee assignment if they bucked their own party leadership. Ron was alone.
Politics favors blowhards, hustlers and shallow opportunists, we concluded. Which makes us wonder how Ron Paul ever got elected to Congress in the first place.
But not only did he get elected…once in Washington, he never sold out. Neither to the right nor the left. He opposed zombies, malingerers and bullies wherever he found them.
Which brings us to the subject of our own presentation to the Nashville crowd. We were following the (QE) money. “St. Louis Fed president James Bullard let the cat out of the bag last week,” we explained.
As Bullard told Bloomberg TV last week:
“I also think that inflation expectations are dropping in the US. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target.
“And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.
“So…continue with QE at a very low level as we have it right now. And then assess our options going forward.”
We didn’t think it would happen so fast. We thought the central bank would wait. We expected a little more hypocrisy…a bit more posturing…a little more phony resistance…a few denials…
…the Fed should have played it cool…coy…elusive…hard to pin down, making investors really sweat before coming to the rescue.
We knew where the Fed would end up…but we didn’t know it would go there so quickly and easily!
Bullard is admitting to a staggering act of vanity and hypocrisy. In the land of free minds and free markets, apparently only the Fed knows what prices equities should fetch.
Henceforth, it will approve all price movements on Wall Street.
To bring you fully into the picture, dear reader, the US central bank has the economy, and the markets, hooked on cheap credit and printing-press money. It has been supplying both on a grand scale for the last five years.
But it had promised to stay away from the playground, beginning this month. Now that the economy is recovering, goes the storyline, the Fed will back away from its emergency measures and allow things to return to normal.
QE ends this month. Higher interest rates are expected next year.
No bubble has ever been created that didn’t have a pin looking for it. And nobody likes it when the two meet up. Last week, it looked as though the Fed’s bubble and Mr. Market’s pin were coming closer. Then quick action by Bullard helped push them apart on Friday.
QE began in November 2008. And zero interest rates began a month later. This has perverted prices for stocks, bonds, houses…and just about every other asset price on the planet. Stocks are worth more than twice what they were at the bottom of the crisis. The average house is worth $60,000 more.
Now QE is ending. And that means a lot less money gushing into financial markets.
Instead of increasing at a 40% rate as it did in 2012, what Richard Duncan calls “excess liquidity” – the difference between what the Fed pumps out via QE and what the government absorbs via borrowing – will go up only 6% this year.
Next year, there will be even less.
With less new money coming from the Fed…and still no real recovery…something’s gotta give. No matter what Fed officials say. And since stocks periodically go down anyway, this seems like as good a time as any.
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Sep 05

What I Told Alan Titchmarsh About $1920 Gold Prices

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Three years to the day since gold prices peaked. Did you call it wrong…?

IT’S SAFE to say gold hasn’t been much fun since prices peaked three years ago this weekend, writes Adrian Ash at BullionVault.
Maybe I should have guessed at the time. Because the same day that spot prices hit $1920 per ounce…Tuesday 6 September, 2011…I got to talk gold as a guest on UK television’s biggest afternoon chatshow.
Gold on national daytime TV…? What more warning could gold bugs want? Hindsight screams sell.
Sadly for irony (and for all-knowing traders), my slot on The Alan Titchmarsh Show didn’t air until the Thursday, two days later.
But the die was cast. Or so hindsight says. The drop which began the very next day was obvious.
Emerging-market central banks should have stopped buying. Gold miners should have sold forward their future production to lock in record prices. And gold investors should have taken profits…quick! 
Gold sank 20% between September and the last day of 2011. It then rallied only to plunge 25% in spring 2013. Since then it has now traded dead-flat for 12 months, some 35% below its peak of three years ago.
Should we all have seen it coming? I think not. 
“Business is certainly strong,” as Paul Tustain, founder and CEO, noted to me here at BullionVault that same, hectic week in 2011. “But it’s still a tiny proportion of the investing public.
“The huge majority of people and portfolios still have no gold at all. What we’re seeing across the market is the prices being marked up by the dealers in search of supply, but no-one is being flushed out. 
“Gold owners simply don’t want to sell, not while the economic situation threatens the wholesale destruction of value in currency assets.” 
Re-read that last sentence again. Then cast your mind back to late-summer 2011…
  • US government debt was downgraded by the credit agencies; 
  • English cities and towns descended into rioting, looting and arson; 
  • Europe’s single currency experiment looked set to explode in general strikes and violence. 
Put another way, unemployment in rich Western countries was surging to Third World levels. The state was losing control. And nothing was “risk-free” anymore.
Clearly, some smart traders chose to quit getting long of gold. Because prices fall when bids refuse to meet offers, and fall they did. But to the best of my knowledge, no pundits or analysts called the top in gold prices. Not with any more confidence than the perma-bears who repeatedly called the top from 2009.
How could they? The economic, financial and social situation across the West hadn’t been this bad since perhaps 1939. 
Oh sure – Warren Buffett, the world’s most famous money manager (and one of its most successful) once advised investors to “Be fearful when others are greedy and greedy when others are fearful.” But you’d need some damned cold logic to overcome the fear sweeping the rich West in late-summer 2011. 
Indeed, you would have needed to get your head examined. 
Just what were the odds of a Eurozone break-up back then – better than evens? And the consequences of that? They could scarcely be imagined. Not when the only paper “safe haven”…US Treasury bonds…faced a genuine threat of default thanks to Washington politicians scoring points against the White House via the debt ceiling farce
In short, the gold market was NOT mis-pricing risk in September 2011. Nor were new buyers. That summer’s surge to record levels simply reflected the very strong chance that the crash of 2008 was only a warm-up. Investors, households and media all agreed. This time, the financial crisis really had landed. 
So forget hindsight. Buying gold at 2011’s record prices was not a “mistake”. Even if it has proven costly to date. 
There’s nothing today which makes those losses less painful. But if you view every decision you make as an all-in bet, then insurance will always look like “dead money”…unless disaster strikes. 
What if the crisis of September 2011 hadn’t eased off? Which outcome would you really prefer?
As I told Alan Titchmarsh three years ago:
“If you think the financial crisis is all over and everything’s going to be sorted out, then gold [at $1920…£1194…or €1375] probably looks pretty expensive as insurance for your other investments right now.” 
Gold is a lot cheaper today. Yet I’m far from sure the financial crisis has truly passed over just yet. 
I guess the European Central Bank agrees, now printing money to try and stoke the economy. Odds are that every other monetary power holding the cost of money at zero for the fifth year running thinks the same.
Maybe someone should tell the stockmarket. But then, no one rings a bell at the top. Not one you can hear at the time.
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Aug 04

Silver: 3 New Tech Uses to Grow 275% by 2018

Gold Price Comments Off on Silver: 3 New Tech Uses to Grow 275% by 2018
Silver use set to jump in flexible touch screens, LED chips and semi-conductor stacking…

SILVER USE in three fast-growing technologies could grow 275% over the next four years, according to new research.
Produced for the Washington-based Silver Institute of international miners, refiners, wholesalers and manufacturers, the 22-page report notes that these newer uses of silver “might at first glance seem modest” compared to industry’s total 15,000-tonne demand for silver per year.
But looking at flexible screens, LEDs and interposers for stacking semi-conductor chips in electronics, London-based consultancy Metals Focus sees these 3 technologies together growing their annual silver use from 125 tonnes to 450 tonnes and more by 2018.
“Although not ‘new’ technologies” in themselves, says Metals Focus, their application of silver “is yet to reach widespread commercial use.” Indeed, it was the 4.5-fold surge in silver prices from 2009 to 2012 – caused by the financial crisis – which led mobile devices such as cell phones and e-readers to use other conductive ink materials, says a separate report from forecasting consultancy IDTechEx, focusing instead on using indium-tin oxide (ITO).
With flexible displays now gaining market-share however, “ITO faces some critical drawbacks,” notes Metals Focus’ silver technology report, because it is a “brittle, fragile material”. Using silver nano-wires instead can make the screen as flexible as the material supporting it, while in terms of visual performance, “95% transparency has already been achieved by some industry players.”
Putting the ink/paste component of the conductive screen industry’s costs at $1.6 billion for 2014, IDTechEx sees the market growing 4.5% per year over the next decade. Touch screens employing silver in the conductive ink currently use some 18-20 grams per square meter on one estimate. Indium itself is primarily mined in China, whereas silver is mined worldwide.  
Forecasting company IHS believes sales of non-ITO touch screens could grow 300% in 2014 alone. According to David Jollie, precious metals analyst at Japanese trading house and London market-maker Mitsui, “Growth in tablets, smart phones and particularly touch screen monitors means silver demand could double here over the next decade, more than offsetting any weakness in silver demand from the photovoltaic [solar panel] sector.”
Global demand for LED chips (light-emitting diodes) is meantime set to reach 61 billion units this year, according to NPD Display Search, more than 250% above the level of only two years ago. Falling demand for LED chips in televisions and other smaller devices is being more than offset by outdoor use and general lighting. Pressured to boost energy efficiency further, the industry is increasingly using silver both to reflect light out of the module, and also in the bonding wire and adhesive layer needed to construct it.
Metals Focus’ third new silver technology, interposers, enable electronics manufacturers to “stack” micro-chips, saving space and boosting functionality. Connecting the different chips together, “Traditionally interposers have been made of silicon,” says their report for the Silver Institute, but new demands means that material “is fast approaching its limit in terms of performance” and cost efficiency.
Using silver is very early-stage yet, Metals Focus stress, and the metal does face competition from other solutions, notably copper. Starting however from a current annual estimate of only 15 tonnes, commercial roll-out “could in principal” see 10-20 times as much silver being used for interposer technology by 2018, “underpinned by strong end-use demand.”
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Jul 25

69 Months of Flat-Line ECG

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A layman might think the economy’s dead. But the Fed stands ready to ensure it is…

NOT MUCH action in the markets, writes Bill Bonner in his Diary of a Rogue Economist.
So let us return to the economy. That’s where the excitement is. According to leading economists – notably those paid by the US government to forecast the future – interest rates are going to stay low for a long time.
Perhaps we should pause and say an Ave Maria…or whatever you say when you put a market cycle into the grave.
Maybe we should proclaim a day of mourning. Or at least raise a glass or two.
Yes, the feds have pronounced our old friend dead. Dead… dead… stiff dead… cold dead. Immobile. They denied responsibility for the death of the credit cycle, but admit that it was in their custody when it expired.
Ever since there were markets there was credit, too. And like all things available in a market, it was subject to rhythms – usually related to harvests. Its price varied according to the rules of supply and demand.
The credit cycle seemed permanent. But like so many things in this transitory life, it has now been taken from us by the central planners at the Fed, the Bank of England, the ECB, the Bank of Japan, etc.
Exeunt omnes. Hallelujah!
Specifically, the Congressional Budget Office (CBO) tells us Washington’s interest rate expense on its debt for the next 25 years will bear a striking resemblance to what have seen over the last few years.
It projects a financing cost of 4.1%. That’s close to the average of the last 10 years – and substantially lower than the long term average of 6.59% since 1962.
The CBO’s estimate – if we are to believe it – tells us interest rates are locked in a permanently low range, like the brain waves of a patient in a coma.
Gone, they say, is the excitement of the 1970s and early 1980s up-cycle, which led to the yield on the 10-year Treasury note peaking at over 14% in 1982.
This is not an inconsequential outlook. If interest rates were to rise appreciably, the “borrow, borrow, borrow… spend, spend, spend” economy would disappear.
No kidding…
The post-1970s world was enabled by several interlocking trends. But most important was the decline in interest rates. This allowed debt to expand in a remarkable way.
Total US credit market debt went from 170% of GDP in the early 1980s to over 350% in 2007. In nominal terms, total US debt went from about $5 trillion to over $50 trillion in 2007.
This had the following effects:
  • Borrowing masked the effects of a slowing real economy. Wages were mostly stagnant. But consumers still spent more money.
  • Spending in excess of real output shifted the economy from one focused on production to one focused on finance and consumption. The financial industry, in particular, saw soaring profits… and used its wealth to control government policy.
  • Governments, too, increased spending.
  • Tax receipts grew along with debt-financed consumption and financial engineering. Tax receipts in 1990 were only about $1 trillion. Now, they are $2.5 trillion. In addition, governments took advantage of low interest rates to borrow more.
This twisted and distorted the economy even further; whether the funds come from borrowing or taxing, government transfers wealth from the productive parts of the economy to those that are unproductive… or even anti-productive.
As time went by, it became more and more important to continue expanding debt. Consumers, business – and the government – had come to depend on expanded credit just to stay in the same place.
Debt expansion became not only an indispensable component of the new economy; it also created its own political support.
With so many people now relying on easy access to credit – including Washington – neither the Fed nor Congress could refuse efforts to hold down interest rates.
So, Congress, the CBO, the Fed… Wall Street… and millions of households and zombies everywhere… all now agree that interest rates cannot be allowed to rise. They must be held down at all costs. If the interest rate cycle is not dead yet, it should be, they reason.
Look at this chart of the Fed funds rate. You see, it looks like the ECG of a man who is brain dead. Flat-lined for 69 months.
And so there they are. Huddled around. Economists. Policy-makers. Politicians. They are all watching him carefully. Checking his pulse. Listening to his breathing…
…and holding a plastic bag in their hands, just in case he seems to be waking up.
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Jul 24

100 Years to the Day Since the Gold Standard Died

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Gold Standard payments through London look awfully like US Dollar clearing a century later…

GOLD loves nothing if not irony, writes Adrian Ash at BullionVault.
And here, 100 years to the day after the approach of World War I killed the Gold Standard stone dead, the world’s monetary system risks breakdown again.
Again you could blame war in a poor corner of Europe. Again, that war could be cast as a big power demanding a small neighbor says “sorry” – then Serbia for the murder of a fat-necked Austrian prince, now Ukraine for ousting its fat-headed Moscow-backed president.
If irony suits, it only tastes richer when you think this week also marks 70 years since the Gold Standard’s replacement was put together as the war that followed the war to end all wars finally slaughtered itself to a close. But that shadow system…of invisible gold and all-too visible paper…didn’t quite die when the Dollar-Exchange system lost its link to bullion. US president Richard Nixon “closed the gold window” at the New York Fed in August 1971, yet the Dollar still rules today. So like world trade needed access to the City of London a century ago, clearing funds through a US bank is vital for world trade today.
Say US clearing becomes unavailable – or untrusted for credit-default or political reasons. Either trade will shut down (see the post-Lehmans’ crisis of 2008), or it will find other systems to use. Comic little pops like bitcoin might suggest that’s where apolitical free trade is headed, onto Silk Road and elsewhere.
Back to 1914, and “It may be,” one merchant banker noted before the July Crisis hit London, “that hides and rabbit skins are being sold from Australia to New York, or coffee from Brazil to Hamburg.” Either way, and whatever was being shipped to wherever, in every such cross-border deal “the buyers and sellers settle up their transaction in London.”
That remains true of wholesale gold and silver today. Lacking any mine production, and with no consumer demand or refinery output to speak of, the UK still hosts the world’s physical bullion market, settled in London’s specialist vaults and ready for “digging out” onto a forklift truck before being shipped to the new owner should they ever want it. From Arizona to Beijing, Perth to Qatar, the world trades market-warranted London Good Delivery bars. Those same standards apply in most local non-London markets as well. Great Britain still rules in gold, an echo of the high classical Gold Standard shot dead a century ago.
Europe’s second 30-year war destroyed Britain’s empire, but London’s role as the centre of money was already ruined. US banks moved into the rubble to settle the world’s business, and the US Dollar took over from Sterling as Washington hoarded central-bank gold to win the peace as well as the war at that Bretton Woods conference of July 1944.
What had stopped the world’s financial heart pumping in London? Scalded in late June 1914 by unknown Serb teenager Gavrilo Princip shooting dead the unlikable Archduke Franz Ferdinand, Austria handed its “belligerent ultimatum” to Belgrade on the evening of Thursday 23 July. Vienna’s 10 outrageous demands made rejection look certain. (Serbia agreed to four, only to find Vienna dismiss its reply and start shelling regardless). Financial markets finally panicked the next morning, at last. They had been slow to take fright, as Niall Ferguson notes of the bond market, distracted by more trouble in Ireland and the coming summer vacation. But now London’s bankers…creditors to half the world’s cross-border transactions, according to Jamie Martin in the London Review of Books…awoke to find their debtors unable to pay. Because “it suddenly became difficult for foreign borrowers to remit payments” anywhere, London would not extend fresh credit. So the world couldn’t raise the loans it needed to settle its debts, and the Sterling bill of exchange – “the world’s premier financial instrument” – went entirely offline.
Sterling bills had been crucial. These bits of paper turned the Classical Gold Standard into that “period of unprecedented economic growth, with relatively free trade in goods, labor and capital” which misty-eyed gold bugs might think came thanks, between about 1880 and the rude end of July 1914, to physical metal alone. Promissory and transferable notes, typically with a 3-month maturity as Martin explains in the LRB, Sterling bills were accepted by traders on one side of the world in payment for goods sent to the other, and then sold to a local bank for cash. Merchant bankers in London then accepted and sold the bills on again, with the original debtor perhaps buying and sending another Sterling bill – rather than shipping physical gold – to settle the deal. Around it all went again. Until Austria’s ultimatum to Serbia stopped it.
Yes, the Sterling standard limped on, and yes, so did something like the Classical Gold Standard after the guns of August finally fell silent in 1918. But private gold had underpinned the whole system before. You could convert cash into gold at your bank, giving them every reason to offer good rates of interest instead. A universal equivalent for all major world currencies, it was vital that the gold was mostly privately owned, rather than trapped in government or central-bank hands (although that was already changing, with fast-growing national hoards announcing the rise of the warfare- and welfare state in the decade before Princip shot the Archduke, much like the political earthquake of WWI had already struck Britain with the People’s Budget five years before). But shipping bullion bars or coin remained clumsy, slow, risky, and thus expensive. So it was paper bills which released the value of the 19th century’s torrent of gold, first Californian, then Australian and finally South African, to grease the first era of globalization.
By the eve of Austria’s ultimatum to Serbia, the bill on London offered to some “a better currency than gold itself,” as a Canadian banker put it, “more economical, more readily transmissible, more efficient.” The City of London, capital of the world, stood ready to buy and sell whatever was wanted.
Nevermind. As Professor Richard Roberts explains in his excellent new Saving the City (free sample here), come 27 July – the Monday after the Serbs got Vienna’s demands – London’s money market was effectively shut. On Tuesday, with major shares like copper-mining giant Rio Tinto dumping 25% in a week, the London Stock Exchange suspended trade for the first time since it opened in 1801. From Wednesday 29 July, commercial banks in Britain stopped paying gold to the long queues of savers pulling out their deposits. But the banking run simply moved to the Bank of England itself, as people lined up on Threadneedle Street to swap the paper £5 notes they’d been given for Sovereign gold coins instead, sucking out £6 million of bullion in three days.
To stall the outflow, the annual Summer Bank Holiday was extended to nearly a week, from Saturday 1 to Friday 7 August. Ahead of the banks reopening, politicians desperate to lock down more gold for the national hoard “vociferously denounced the [private] hoarding of gold in speeches in the House of Commons,” says Professor Roberts. But by then, Great Britain had already declared war on Germany on Tuesday the 4th. The Gold Standard would never recover, built as it was on free trade, Britain’s imperial Navy and those Sterling bills of exchange on London’s credit.
Yes, London’s role as gold clearing house continues today (for now). But total war needed endless state spending. So the free-trade basics – and bullion limits – of the global Gold Standard could no longer apply. Private gold shipments were replaced by government-to-government transfers inside the Bank of England, the Bank for International Settlements, and the New York Fed…before French warships hauled metal to Paris, and Russian Aeroflot jets swapped Kremlin gold for Canadian wheat. London’s Sterling bills have meantime long rotted as the world’s key means of exchange. Which brings us to the US Dollar here in 2014.
French bank BNP Paribas now faces a $9 billion penalty “and a one-year suspension in 2015 of direct US Dollar clearing on its and gas, energy and commodity finance businesses,” explains Pensions & Investments Online, after pleading guilty to $30 billion of transactions “with countries that are under US government sanction.”
That’s some slapdown. “Temporarily restricting its ability to handle transactions in Dollars,” says Bloomberg, “would present BNP with administrative costs and could test the willingness of clients to remain with the bank.”
Where else might those clients go? Forget the Yuan for the foreseeable future. The Dollar accounts for 41% of global payments by value, with the Euro at 32% and the British Pound in third place with 8%. The Chinese currency is way off the pace with just 1.5%. The Yuan accounts for only 23% of China’s own direct trade with the rest of Asia!
Financing crooks or clearing their deals is a bad thing, of course. But the list of countries wearing “US goverrnment sanction” only gets longer. Parking or trading your money only gets tougher if your home-state doesn’t suit what Washington thinks. Yes, a London government spokesman when asked Wednesday said there is a link – “a correlation” indeed – between the UK’s new sanctions against Moscow and outflows from London of Russian oligarchs’ cash. “That is certainly the case,” as money scared of being frozen or seized gets out while there’s still time. But London or Frankfurt today is nothing next to the United States’ place in clearing global finance.
“No international bank,” as the Financial Times noted last week, “can operate without access to the US money markets.” And with access now restricted, claims FTfm columnist John Dizard, thanks to “dangerously stupid punitive actions and fines levied on banks using the international Dollar clearing system [means] the world is finding ways to get along without the Dollar.”
Chief amongst them, according to Dizard’s shadowy “sources”, is gold – “the most expensive and least convenient of all monetary alternatives to the Dollar.” Is he kidding? Perhaps not.
“Gold is very heavy to carry and often has to be re-assayed by the person accepting it as payment,” Dizard goes on, “since there is often a lack of trust among participants in the off-the-books transactions that use it.” No London Good Delivery and its chain of integrity here, in short. But where the rules roll over the trade, as India’s surging gold smuggling proves, the trade will find a way if it must.
“Not many transactions or investments are actually invoiced in gold as such,” says Dizard. “Instead gold is used as the settlement medium rather than for the price quotation.”
So welcome to our neo-Classical Gold Standard. “Gold’s popularity as a medium of international exchange,” Dizard says, “has been soaring.” The US might yet adapt, and accept that everyone pays who uses the Dollar, rather than inviting the world to find a replacement instead. Legal drug dealers in the United States, after all, need somewhere to bank their profits too.
Happy 100th birthday meantime to the death of gold money.
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Jul 22

The IMF’s Pre-Revolutionary French Fix

Gold Price Comments Off on The IMF’s Pre-Revolutionary French Fix
A nest of Keynesian paradoxes and economic canards…

IT WAS something of an irony last week when the idiots savants who constitute the upper ranks of the ineffable current incarnation of the IMF decided briefly to forgo their penchant for the politics of the Montagnard – more inflation, higher wages, death to the speculators, les aristocrats à la lanterne, that sort of thing – in favour of those of the ancien régime, writes Sean Corrigan of Diapason Commodities at the Cobden Centre.
Specifically, this took the form of updated proposals for a ‘Visa’ of the kind twice instituted in early 18th century France; the first to try to clear up the fiscal mess which was the principle legacy of the military vainglory of the just departed Sun King and a second time to mop up after that QE disaster of its time, John Law’s infamous ‘System’.
Sorting the participants into five classes whose activities were deemed to have been increasingly speculative – and hence liable to more swingeing penalties – those in charge of the Visa saw to it that the bigger players (or at least those bigger players unable to use their royal connections to secure themselves an indemnity) suffered haircuts, retrospective tax assessments, forcible debt extensions, property confiscation – and, in one or two cases, a salutary trip to the Bastille.
Jump forward three centuries and in its latest position paper on sovereign debt ‘resolution’ the IMF is drooling about dipping, in a not wholly dissimilar fashion, into people’s pension funds and insurance policies – since these are seen to be easy targets – as well as about imposing arbitrary prolongations of tenor on outstanding securities should the state’s chronic mismanagement end up rendering it temporarily unable to entice sufficient new or repeat suckers into enabling the maintenance of its naked fiscal Ponzi scheme.
We are all for adopting a stance of unsentimental realism when it comes to facing problems of over-indebtedness and, further, that we have long bemoaned the readiness of governments to swell their own commitments in the aftermath of financial crises, not just because of the inherent cronyism and inequity which riddles most TBTF assistance packages, but because sovereign debt is intractable in a way that private sector obligations generally are not. We are, therefore, more than happy to see all breaches of contract – which is what the unpayability of a debt involves – dealt with in as clinical and judicial way as possible, no matter whether these failures are misjudgements, examples of malfeasance, of ‘acts of god’. Moreover, we are exceedingly happy to see anything which reminds people that, despite the modern fiction of the ‘risk-free’ rate which attaches to them, Leviathan’s IOUs have always been among the least trustworthy of all pledges to pay.
However, that principal is not what is at issue here, but what does gall is the IMF’s glib reliance on the sneaky, archly legalistic, announce-it-once-the-banks-are-closed repudiation of existing agreements by a borrower which has not only promoted itself as the one true guardian of the people’s well-being, but which has frequently given its subjects precious little choice but to trust a goodly part of the surplus they have wrung from their already sorely-taxed income to those same instruments whose terms the state is now unilaterally amending in its favour.
As yet one more example of the sinister creed of ‘Gemeinnutz geht vor Eigennutz’, this betrays the classic statist proclivity to view all notionally private property as really belonging to the Collective, even if this is rarely expressed so clearly today as it was when last elevated into a central tenet of axe-and-bundle political theory in the 1920s and 30s.
“What’s yours is only truly so to the extent that we, the functionaries of the Hive, do not decide that we have a better use for it and so do not exercise what we insist is our prior claim to it,” they imply, though a little more disingenuously than heretofore.
Having ignited an all too short-lived burst of outrage at last year’s more overt Visa proposal to go for a straight confiscation of 10% of ‘wealth’, this latest business of simply denying people an exit route has the poisonous virtue of being more subtle in its operation and therefore of being more likely to pass into effect all unremarked, even if the effect upon those being locked in would be broadly equivalent in many respects.
Moreover, for all the weasel words uttered in the Fund’s blueprint about limiting moral hazard, the plan explicitly endorses what it archly terms the ‘reprofiling’ measure on the grounds that it serves to deliver a ‘larger creditor base’ into the meat-grinder and hence helps limit damage to ‘longer-term creditors who would have otherwise had to shoulder the full burden of the debt reduction’ As an added bonus, stiffing one’s existing creditors in place of begging a payday loan from Uncle IMF ‘…increases the chances of a more rapid return to the market, as the debt stock will be less burdened by senior claims’ – i.e., those emanating from the IMF itself. A third, tacit advantage would be that since the IMF would not be not committing an actual monies, there need be no debate among its members about the implementation of such a programme, while the softening of the criteria calling for its use from one where the state’s finances are categorically ‘unsustainable’ to one where there is a mere inability to rule out the arrival of such a contingency drastically lowers the nuclear threshold.
One might object that the very knowledge that such steps could be taken would be enough to destroy any residual element of ‘sustainability’ with which a given sovereign’s budget might otherwise be imbued. If people became aware that in buying a 3-month T-bill (and buying it at vanishingly small rates of interest at that) they were also selling their overlords a 30-year put, or that the YTW calculation of their security really ought to include the chance of a 10% principal reduction, would they not try to incorporate this in its price, thereby pushing up yields and so aggravating any incipient funding difficulties? Might they, indeed, not halt their discretionary purchases altogether and so advance rather than retard the onset of the crisis?
Given that they are each, in their own way, subject to the compulsions of so-called ‘prudential’ regulations with regard to the assets they must hold to ensure their solvency and liquidity, would such ‘captives’ as the banks, pension funds, and insurers thus be left the only buyers outside of the ever-eager to oblige central bank? A moment’s consideration of what could happen to the most fragile of these – the already-impaired banks – if their assets were suddenly to suffer another sizeable mark down as a result of state defalcation shows why the IMF wants the universe of the afflicted to be as all-inclusive as possible. That way, however large the absolute loss might be, the percentage loss to each holder could be conveniently minimized as the poor individual innocent was once again mulcted to provide a subsidy for the rich, corporate players whose fate is so closely entwined with that of their overlords.
Thus, under the terms of this new wheeze, we might imagine a day when the following missive drops onto the doormat of the Forgotten Men and Women up and down the country
“Dear Grandma and Grandad, thank you for making the valiant effort over these past decades to achieve a measure of self-reliance in your dotage and for allowing us jacks-in-office full use of your savings in the meanwhile as both a means to fulfil our political ambitions and as a way to act out our own economically-illiterate and usually illiberal prejudices at the expense of you and yours.
“Sadly, it transpires that we have not only wasted a goodly part of your savings, but we have greatly added to the host of irredeemable promises which we made to you, in the form of a mountain of even more pressing pledges issued to the Biggest of Big Fish in the financial markets. So that we do not entirely dissuade these latter sophisticates from again indulging our follies at the earliest opportunity, we shall now have to ask you to share – and thereby greatly to reduce – their pain.
“Be assured, however, that the loss for which you have my heartfelt sympathy will patriotically ensure that we can continue to live well beyond our means. In this way your sacrifice will see to it that the least possible harm will come to any of us in the political classes (a.k.a. the agents of your misfortune), to our army of placemen, patronage-seekers, and dole-gatherers, or to our plutocratic enablers for – as the IMF puts it – ‘…resources that would otherwise have been paid out to creditors will have been retained [to] reduce [our] overall financing needs.’ Nor will we have to suffer the indignity of modifying our existing approach overmuch by actually only spending money on the things for which you, in true democratic fashion, have openly voted the taxes since – here let me cite those marvellous chaps in Washington, once again – ‘resources could be efficiently employed to allow for a less constraining adjustment path.’, i.e., to allow one demanding as little fundamental ‘adjustment’ as possible.
“I feel confident you will join me in looking forward with some enthusiasm to the next, inevitable ‘reprofiling’, just as soon as we can arrange to overspend enough to make one necessary once again. Should I have already laid down the heavy burden of selfless public service by the time this comes about and gone instead to my just reward as a highly-paid ‘consultant’ to a global investment bank, I would urge you to give your full support to my successor, of whatever political stripe he or she may be. In such an event, there will, of course, be precious little different in the treatment you receive at the hands of any of the mainstream parties as currently constituted.
“Yours Insincerely, The Minister of Finance.”
It is all too easy at present to make fun of the IMF, though in so doing we should bear in mind that such ridicule is perhaps the only weapon we have in our fight to prevent it from lending a spurious air of rationality to the worst predilections of our national nomenklatura.
A case in point is that, at the conclusion of its periodic, Article IV review of the economic condition of the homeland of so many of those in the upper reaches of the Fund, the website prominently carried the triumphant banner, “France: Policies on the Right Track“!
Truly, you could not make this up. For a slightly less self-justificatory assessment, one only has to trawl briefly through the Bloomberg series or consult the most recent verdict of the official ‘auditor’ of the nation, the Cours de Comptes.
There it becomes readily apparent that while the two decades prior to the first oil shock saw Real GDP, ex-government trend upward at a 5.5% annualized rate, and the next three decades managed 2.3% compound, the last seven years have seen no progress made whatsoever. Similarly, real capital formation by non-financial business has decelerated from 7.5% to 2.9% to zero over those same divisions of time. Exports stand at close to a 6 ½ year low and two-way trade at the weakest in more than three years. Industrial output – a whisker off the worst since the rebound from the GFC – lies 13% below its peak and hence no higher than it first reached in 1988
Government expenditures, meanwhile, have swollen to a record 58% of overall GDP, 80% of private, with taxes some 4-5% behind. These are levels only exceeded in the EU by Finland, Denmark, Greece, and Slovenia. The EU-calibrated debt:GDP ratio has risen by 30% of GDP since the Crash and by 12% since 2010 alone (that latter a slippage of 15% compared to the German pathway from an almost identical starting point). Here, fast approaching €2 trillion outright, it stands at 94% of overall GDP and therefore at 120% of that of the private component out of whose income that debt must be ultimately serviced.
Yes, policies are indeed on the right track, assuming that track itself is an economic highway to hell.
Given the foregoing, it was of note that the Governor of the Banque de France, Christian Noyer, insisted over the weekend that it might be highly counter-productive to speculate publicly about any programme of even partial debt repudiation.
“This all corresponds to a somewhat contrived definition of sustainability and ignores the highly disruptive effects…besides, it relies on a very pessimistic growth outlook,” he argued. 
“Once one starts not to pay ones debts, borrowing becomes very expensive and the impact on growth greatly exceeds that of managing a gentle reduction in debt.”
The only problem with such a judgement is that M. Noyer’s preferred – if sometimes implicit – remedy is for a reinforcement of the policies which have so signally failed France over the past several years – viz., further extreme monetization of assets (to include equities, if need be) and a weaker currency.
As a result, we find ourselves ensnared in a nest of Keynesian paradoxes and economic canards. We need more investment, we are told, but the only means we can imagine to stimulate it is to lower interest rates. We understand that debt levels are too high, but we are so terrified that they might actually begin to be reduced that we subsidize profligacy as the default option of policy. We fret that prices of assets are rising as a result, not the price of labour (which we implicitly want to increase so we can reduce debt ratios, rather than debt itself) and in order to offset a form of inequality we ourselves have engendered, we stultify an economy already overburdened with rules and regulations with that en vogue form of top-down, baby-with-the-bathwater interference we style ‘macroprudential’ policy.
We want to see more people in work, on the one hand we work manfully to introduce ingenious tax and benefit ‘wedges’ which act to discourage marginal job seekers and, on the other, we call for the cost of labour to be raised through higher minimum wage rates (and or plain-old monetary inflation). We decry the fact that businesses will not hire while lowering the prospective economic returns to such hiring by seeking to tax profits more heavily.
The reality is that it does not have to be like this. The curse of macroeconomics is that it takes what should be a crude metalanguage which merely attempts the convenient shorthand of describing an impossibly complex but largely self-organising whole using a few, hopefully representative general features and attempts to elevate it into a rigorous, cybernetic control system to be twiddled and fiddled by the fingers of Philosopher Kings. Given this assertion, let us try instead to work from the other – the microeconomic – end and see if we can shed a little light on this dark and dismal scene.
If Robinson Crusoe wishes to survive his enforced sojourn on his remote island, he must only engage in such activities as provide him with a flow of the needs – at their most elementary, sustenance and shelter – that is at minimum no smaller than their accomplishment costs him in the expenditure of time and effort. The more astute he is in doing this, the more alert and adaptable he is in going about it, the wider will be the margin of success he enjoys, the more rapidly his most essential requirements will be satisfied, and the sooner he can move on to meeting a broader range of desires and to building up a precautionary reserve against misfortune.
It should then be obvious that, when Friday washes up over the reef, Crusoe – unless driven by an inexhaustible fund of potentially-self-endangering altruism – will not be able to offer his new companion an ongoing share in his accomplishments, free access to his stock of implements, or the instant ability to draw upon his, Crusoe’s, hard-won skill and understanding if Friday does not at the very least act in a manner which exacts no net toll of Crusoe (including the unseen one of foregoing better opportunities for gain in their use elsewhere). In fact, he would be unlikely to take the risk of depleting his own scarce resources and of squandering his finite energies if Friday does not contribute something beyond such a bare material parity, the which surplus he, Crusoe, will be able to use to increase the future possibilities open for the two of them to exploit.
If we stop to think about it clearly, Crusoe’s surplus income – and let us not be shy to call this his profit – is what enables him firstly to improve his own standard of living (to invest) and eventually to afford Friday the means with which to leapfrog away from the perils and privation of shipwrecked destitution to the more secure and less impoverished existence he may lead if he contracts to work under the guidance of Crusoe’s entrepreneurial instincts while utilising some of Crusoe’s already-produced stock of capital. For this, Friday earns himself the right to avail himself of an agreed proportion of the goods (the income) they generate through their mutual collaboration. Once more, it is Crusoe who rightly accedes to and disposes of any subsequent excess which he by his craft, and they two by their sweat, can conjure out of the unforgiving surroundings of their savage little world.
Assuming Crusoe to be as diligent in his way as Friday is in his, the generation of each successive surplus will allow Crusoe progressively to improve the quality, quantity, and variety of means they each can employ, so that Friday, as well as he, can enjoy those better returns on his effort which accrue from the fact that his capital endowment has risen, those better returns being what we call a higher real wage.
It is all very well to bewail the fact that, in the modern world, the admirably rugged individual, Crusoe, has been transformed into that bête noire of the scribbling and scriptwriting classes – the faceless and vaguely sinister Crusoe Incorporated – and it may equally be a matter of unthinking dogma that ‘profit’ like ‘property’ is theft, but the truth remains that what applied to our pairing of Lost-prequel cast members still applies in the disembodied world of distributed shareholding and managerial agency: profit is both the sign of entrepreneurial success and the seedcorn of capital provision; labour will only be – can only be – hired if the value of its product exceeds the cost of its retention; and the more capital each worker has at his disposal (including the kind contained between his ears), the greater will be the likely worth of his product and hence the more lavish his reward.
There are no short cuts on offer. Or perhaps none which bear up to the test of self-sustainability. Thus, the would-be macro-puppeteers of the kind characterised by deputy Bank of England governor Jon Cunliffe when he waxed metaphorical in a recent speech about how the Old Lady’s duty was to “steer” the economy “at the highest speed that can be achieved…down a winding road” can be seen both to seriously overate their powers to do good and to vastly underestimate their proclivity to do harm.
Allow a man the scope both to make and keep a profit (to win receipts greater than costs, adjusted for the passage of time); place no restrictions on the terms of the mutually-beneficial, freely-contracted co-operation into which he enters with less adventurous, but no less assiduous, persons as he seeks to do so; do as little as possible to add to the costs of any such contract (monetary manipulation herein included) and thus to dissuade either party from entering into it; subject our man to no deterrent to ploughing the fruits of this cycle’s endeavours back into the attempt to make those of the next more succulent and more plentiful and, by and large, though failures will occur and frauds will not be unknown, all those involved will flourish – even if they happen to live in a France where, the last we heard, the laws of economics still applied and where it was not the people who were failing but those who ruled over them.
But let us not to be too unfair to the worthies who reside among the splendours of the Elysée, the Matignon, or Bercy: as the Cours de Comptes points out, the performance of their counterparts on the other side of the Channel has in many ways been just as unimpressive.
The UK, after all, still runs a deficit of around £100 billion a year, 6% of total and 8% of private sector GDP. Net debt of more than £1.4 trillion amounts to 85% of overall and 110% of private GDP (even without counting in the obligations pertaining to the bailed-out banks) and has doubled in five years, tripled in nine. Total spending has risen by a half since 2005, climbing 5% of pGDP in that time to reach a very lofty 52.5% – and this despite all the bleating about swingeing ‘austerity’. The £650 billion which comprises that churn amounts to around £200, or more than 31 hours of minimum wage pay, per week for every man, woman, and child in the country. Not entirely unrelated is the fact that the current account gap yawns as wide as £75 billion a year, equivalent to what is fast approaching a post-war record of 4.5% of total, 6% of private GDP.
Here, too, the optimists have been somewhat deceived by their hopes of undergoing a true economic revival. Though the series is bumpy, manufacturing output in May appears to have stalled, suffering its largest drop since the harsh winter of 2013 and leaving overall industrial production barely 3.5% off 2012′s 27-year lows and still having 80% of its GFC losses to make up.
Despite the glaringly obvious construction that the UK is once more undergoing a lax money, too-low interest rate, classic, Tory Chancellor pre-election boom – all about non-tradables, a housing mania, an excess of imports, and plagued with soft-budget government incontinence – the myopically GDP-fixated macromancers cannot resist becoming ecstatic at the results.
Jack Meaning, a research fellow at the highly-regarded National Institute of Economic and Social Research, for example, was quoted this week in the broadsheets in full Trumpet Voluntary mode:
“The outlook is very positive,” he exulted. “Growth now is very much entrenched, and given all the positive data that has come out, it looks like growth is here to stay.”
Hmmmm! While it is true that the Carney-Osborne duumvirate will do nothing to restrict access to the punch bowl:
  • before the Scottish Independence referendum;
  • before the UK General Election next spring; and
  • if it can be managed, before our beloved Governor quits (in 2017…?) to leave his palm print on the pavement of Grauman’s Chinese Theater en route to what is rumoured to be his apotheosis at the pinnacle of the Canadian Liberal Party hierarchy,
then the longer this particular locomotive of ‘growth’ progresses along its current track, the more certain we can be that it will terminate in the same, drear Vale of Tears where all its predecessors have hit the buffers.
As for the US – where policy has retrogressed through some sort of Phillips Curve warping of the space-time continuum to make un(der)employment the only real matter of concern – well, let’s not get too bogged down in the to and fro about Birth:Death adjustments, the household versus the establishment survey, competing explanations for a falling participation rate, part-time versus full-time job issues and all the rest of the minutiae.
Taking the data at face value, private sector jobs (adding agriculture and self-employed to the establishment total) seem to have risen over the whole of the last four years by a remarkably steady 180k a month, 1.8% a year, for a cumulative 870k gain which is pretty much in tune with the simultaneous official estimate of 910k in population growth. While similar to the pace mapped out in the 2003/07 expansion (then 210k and 1.6% off a higher base), this is one of the slower episodes in the last half century. If we calculate the real wage fund (2.1% outright and 1.4% per capita) or real private GDP (3.0% outright and 2.3% per capita) we get similar results: the US private sector has been expanding reasonably, if a little tardily, in real terms though it has also been more obviously lagging in nominal ones.
Why no faster rebound? Certainly not because interest rates are too high, or government outlays too parsimonious, or because the ‘low-hanging fruit’ of human progress has been well and truly plucked to leave us the unpalatable choice between ‘secular stagnation’ and an invigorating burst of warfare.
Read the Crusoe paragraphs again: incentives matter, especially at the margin. And among the many perverse incentives to limit hiring we have, just as in the 1930s, a whole host of programmatic and regulatory barriers to take into account – extended benefits, changes to health care, access to classification as ‘disabled’, unemployment insurance rules, and so on.
Though America is not as sorely afflicted with these hindrances as are many Western nations, it is not hard to see that the sort of work done by Richard Vedder and Lowell Galloway, by Lee Ohanian, by Robert Higgs, and lately by Casey Mulligan all come back to the same basic conclusion: that for the micro-economics of job-creation to take hold, the legal and institutional framework must not only be conducive to fostering the hope of gain among those seeking to employ both capital and labour (including their own), but it must be straightforward to negotiate and stable in its composition. Neither constant bureaucratic tampering, nor wrenching shifts in fiscal or monetary policy – with all the wilder swings they transmit via the financial markets through which they act – can contribute much that is positive, for all the arrogance of the Colossi who never cease to promulgate them.
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Jul 20

What’s the True Rate of Inflation?

Gold Price Comments Off on What’s the True Rate of Inflation?
Watch commodities, and wages, for unmassaged price-level reports…

In AN AGE when governments of every political leaning and ideological stripe distort economic data to promote their parties’ interests, it is hardly surprising that the nation’s inflation rate is reported in a manner that best suits their political needs, writes Gary Dorsch, editor of the Global Money Trends newsletter.
By the same token, in an age of near universal cynicism on the part of citizens towards their corrupt politicians, it is entirely natural for official inflation data to be wildly at odds with the reality faced by consumers and businesses, and in turn, to be regarded with utter disbelief.
Since the days of the Clinton administration, the US government has tinkered with the methodology of computing the inflation rate, and therefore, the CPI is no longer considered to be an objective gauge of the prices of a fixed basket of goods, that consumers normally buy. Instead, the US government has a vested interest in understating the true rate of inflation, because it enables Washington to lower cost of living allowances for Social Security checks, helps the Fed to keep interest rates artificially low, weakens wage demands, buoys confidence in the US Dollar, and artificially increases the “real” rate of US economic output.
The tens of thousands of government apparatchiks who work for the Bureau of Labor Statistics, Bureau of Economic Analysis, US Treasury, Office of Management and Budget, Economics and Statistics Administration, and countless other agencies, massage their spreadsheets day in and day out, and fudge the numbers. It’s hard not to notice that the inflation rate is reported with distortions caused by seasonal adjustments, hedonic deflators, chain-weighted substitutions, skewed sampling, delayed reporting, and with a twist of political bias. Yet perhaps the simplest advice on how to resolve contradictions between the costs that households face everyday, and the phony CPI, is to watch the Dollars and cents flowing through the global commodity markets, and to map their longer term price trends. Who are you going to believe, the commodity price charts or the skewed data from government apparatchiks? 
According to the Bureau of Labor Statistics, in 2012, US households spent 40% of their total expenditures on commodities, and the remaining 60% was spent on services. Thus, the commodities markets have become less of a leading indicator of future trends of inflation than in the past, when commodities made up 58% of expenditures in 1980 and 64% in 1970.
Still, the alternative to relying on the commodities markets for clues on inflation, is to blindly adopt the Fed’s favorite gauge of inflation, the “personal-consumption-expenditures” price index, (the PCE), which strips out the cost of the basic essentials of life, and is conjured-up by apparatchiks. The PCE was reported to be 1.8% higher in May from a year earlier, or -0.3% less than the CPI. 
On 17 June 2014, the US government reported that consumer prices increased 0.4% in May – the biggest monthly increase in more than a year – saying the cost of food and gasoline showed big gains. Airline fares jumped 5.8%, their largest monthly increase in 15 years. The cost of clothing, prescription drugs and new cars all showed increases. Overall, the consumer price index was 2.1% higher compared with a year earlier. That left prices rising at slightly above the Fed’s so-called 2% inflation target, and traders questioned if the uptick would sound the alarm bells at the Yellen Fed.
The increase in the consumer inflation rate was preceded by a sharp upturn in the market value of the Continuous Commodity Index (CCI), a basket of 17-equally weighted commodities – that started in January ’14. Six months later, the CCI was trading 9% higher than a year earlier. For the first time in 2-½ years, the CCI has emerged from deflation territory (or negative year-over-year returns). However, commodity prices are notoriously volatile, and so, the outlook for inflation can often turn on a dime.
Commodity markets are notoriously volatile from month to month, and from year to year, quite often due to unforeseen acts of nature or military conflict. However, in order to filter out the “noise” of the markets, a simple approach is to take a much longer-term view of price trends. And for a wide array of commodities, their prices have trended significantly higher.
For some of the basic staples of life, the market price of rough rice is up 83% higher, Butter is up 69%, and unleaded gasoline is up 67%, compared with 8.5 years ago. Milk and cattle prices are up 63%, and the cost of wheat is up 61%. So when Americans are driving to the grocery store, they are feeling the pinch of accumulated rates of inflation.
But what about the wages of the US worker, have they kept pace with the increasing cost of living? According to the Labor Dept apparatchiks, the average wage is up 19% compared with 8.5 years ago, for an increase of 2.2% per year, on average. However, for many Americans, their incomes are actually declining and that could put a squeeze on discretionary spending.
For example, in the month of June ’14, the BLS reported that the number of higher paying, full-time jobs plunged by 523,000 to 118.2 million while lesser paying, part-time jobs increased 799,000 to over 28 million. That suggests that many US workers’ are being forced into part-time work, and their income is decreasing. Thus, the hallowing out of the US middle class and the impoverishment of the lower income groups is worsening.
As such, the Fed is already talking about moving the goal posts again, from targeting inflation to targeting wage increases. “Signs of labor-market slack include slow wage growth and low labor-force participation,” Fed chief Yellen said on 15 July. Earlier, on 11 July, Chicago Fed chief Charles Evans said on Bloomberg TV that it would not be a “catastrophe” to allow the inflation rate to overshoot the Fed’s 2% target.
“Even a 2.4% inflation rate, I think that could work out,” he said.
So the message is; the Fed would be tolerant of above target inflation, since lower paying part-time wages are supposed to keep inflationary pressures in check. For the Fed, with the passage of time, many of its sins of the past, in the form of a higher cost of living, are seemingly washed away into obscurity.
When asked about the recent uptick in the consumer inflation rate to 2.1% in the month of May, Fed chief Janet Yellen downplayed the threat saying; “So I think recent readings on, for example, the CPI index, have been a bit on the high side, but I think it’s – the data we are seeing is noisy. It’s important to remember that, broadly speaking, inflation is evolving in line with the Committee’s [ie, politburo’s] expectations. The Fed [ie, a politically appointed Politburo] has expected a gradual return in inflation towards its 2% objective, and I think the recent evidence we have seen…suggests that we are moving back gradually over time to our 2% objective, and I see things roughly in line with where we expected inflation to be,” she said.
However, the reality for the 48 million Americans that are receiving food stamps is their monthly stipend is buying a lot less butter, cheddar cheese, chocolate, and milk, these days. At the Chicago Mercantile Exchange, the nearby futures contract for Milk futures is 23% higher, compared with a year ago, and up 75% compared with 8.5 years ago. However, in the Fed’s view, the soaring cost of dairy products is only transitory. After all, according to the Law of Gravity, what goes up must eventually come down, right? 
From Asia to South America, the demand for US dairy products processed foods containing milk, such as cheddar cheese, is up 19% compared with a year ago, according to the US Dairy Export Council. Exports of cheese jumped 46% in the past year, led by a 38% increase to Mexico, the biggest buyer of US dairy products, and a doubling of sales to China.Exports of dry milk now account for 16% of all dairy sales, compared with 5% a decade ago. As such, dairy farmers’ revenue soared 35% last year to $584 million.
So far this year, rising dairy and meat costs are the biggest sources of inflation. Safeway, the second-largest US supermarket operatorwith a network of more than 2,400-stores and 250,000 employees, said on April 23rd, that it plans to pass along the higher costs for meat, produce and other staples on to shoppers at its US grocery stores in the second quarter.
Hershey (NYSE:HSY) – the No.1 candy maker in the United States – said it would increase prices of its instant consumable, multi-pack, packaged candy and grocery lines by about 8% to tackle rising commodity costs, with Cocoa futures trading at a 3-year high.
However, higher prices for dairy products have widened profits margins for farmers, and in turn, they are already decreasing their dairy cow culling rates, in order to boost the supply of milk. New Zealand, the world’s top dairy exporter, is expanding its output of milk to an all-time high, in order to meet growing demand in China, and is setting the stage for a surplus of milk, in the months ahead.
Increased output in New Zealand has already rattled the milk futures market on the Chicago Mercantile Exchange. The nearby contract has slumped 12% from a record high of $24.32 per hundred pounds in April. Class III milk, used to make cheese, closed at $21.42 per hundred pounds this week. The price of nearby Cheddar Cheese futures have dropped from an all-time of $2.35 per pound to $2.04 today.
In a year when American dairy farmers are enjoying windfall profits, other US farmers can expect to see lower earnings than in 2013. US farmers will suffer a 21% drop in net-cash income, on average, due to sharply lower prices for their biggest cash crops, corn, wheat and soybeans. At the same time, dairy farmers will earn 28% more or roughly $334,100 on average, this year, the USDA predicts.
Two years ago, on the Chicago Board of Trade, Corn futures sold for as high as $8.43 per bushel shortly after the US Dept of Agriculture gave its assessment of the effects of the historic drought plaguing the Farm Belt. The USDA lowered its estimate of the US’s corn production at 10.8 billion bushels, or 13% below 2011, and the lowest since 2006.
However, US farmers figured that drought like conditions would last for a long time, and many decided to profit from record high prices by boosting output. In turn, the collective actions of the farmers created a huge glut of supply in today’s grains markets.
Two years removed from a devastating drought that sent US grain prices soaring, the price of Corn has dropped in half, tumbling to $3.75 per bushel today, and its lowest level in four years. It’s estimated that the average cost of production is around $3.50 for a bushel of corn, which could act as a floor for corn prices. Soybean prices have plunged from a record high of $18 per bushel two years ago, to $11.80 per bushel today, its longest slump in 41 years. The farther dated Nov ’14 contract is priced below $11 per bushel. The USDA says US farmers will harvest 3.8 billion bushels of soybeans this year, compared with last year’s crop of 3.3 billion. Amid a bumper crop that is expected to boost global stockpiles to the highest level in 14 years, corn futures are down 44%, wheat is 24% lower, soybeans 20% lower, and rice is down 18%
Of more than 50,000 edible plant species in the world, only a few hundred contribute significantly to food supplies. Just 15 crop plants provide 90% of the world’s food energy intake, with three rice, maize (corn) and wheat – making up two-thirds of this. 
Whether birthed from Indian soil, or in China or Japan, rice is a staple food for nearly one-half of the world’s population. Today, rice and wheat share equal importance as leading food sources for humankind.rice provides fully 60% of the food intake in Southeast Asia and about 35% in East Asia and South Asia. The highest level of per capita rice consumption is in Bangladesh, Cambodia, Indonesia, Laos, Thailand, and Vietnam.
Yet only 5% of the global rice crop is available for export. Thus, rice commands a higher price than wheat on the international market, because a higher percentage of the wheat crop (16%) is available for export. That leaves small rice-producing countries such as Thailand, Vietnam, and the US as the top exporters of rice. On the basis of yield, rice crops produce more food energy and protein supply per hectare than wheat and maize. Hence, rice can support more people per unit of land than the two other staples.
With its invaluable status as a staple food source in two of the most populous nations on earth and the domination of its export share by relatively small producers, rough rice futures have attracted both hedgers and speculators. In July ’12, China, the world’s top rice producer and consumer, launched the early Indica rice futures contract on the Zhengzhou Commodity Exchange – a world bellwether.
Since the inception of the contract, early Indica rice futures have been gripped by a grizzly bear market, losing 28% to 2,050 Yuan per ton this week. Yet Rough Rice futures traded on the CBoT were remarkably stable over the past few years, gyrating within a narrow range between $14 and $16 per hundred weight (cwt). However, starting in late May ’14, Chicago rice began to tumble, plunging 10% over a two-week period to as low as $14/cwt, before crashing to $12.85/cwt this week. This is certainly good news for citizens residing in the Emerging countries, where households spend as much as 30% of their income on purchases of food.
A pickup in the US’s official consumer inflation rate towards the central bank’s 2% objective has some Fed officials warning about the danger of risking faster inflation in the future by waiting too long to start raising interest rates.
The Fed hawks argue that the central bank must move to tighten its monetary policy sooner, rather than later. The way Philly Fed chief Charles Plosser sees it, the Fed is sitting on a ticking time bomb.
“One thing I worry about is that if we are late, in this environment, with $2.7 trillion of excess reserves, the consequences might be more dramatic than in previous times. If lending begins to surge and those reserves start to pour out of the banking system, that’s going to put pressure on inflation.”
However, Janet Yellen – the money printer in chief – is not swayed by the hawkish view.
“Inflation has moved up in recent months” she acknowledged, “but decisions about the path of the federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook,” Yellen told Congress on 15 July.
“The Fed does need to be quite cautious with respect to monetary policy. We have seen false dawns in the past.
“With wages growing slowly and raw material prices generally flat or moving downward, firms are not facing much in the way of cost pressures that they might otherwise try to pass on,” the Fed said in a report accompanying Yellen’s testimony.
It’s true that the most economically sensitive commodities, traded in Shanghai, such as steel, iron ore and rubber, are trading at sharply lower levels than compared with a year ago, and thus, helping to keep a lid on factory-gate inflation. 
Free-falling cotton futures hit fresh two-year-plus lows to close around 68 US cents, amid expectations for a buildup in US stockpiles and growing world inventories outside China. In June, the World Bank cut its projection for global growth to 2.8% this year, from its earlier estimate of 3.2%.
That’s half the growth rate of the pre-financial crisis economy.
The World Bank also downgraded its outlook for the US economy to 2.1% for 2014, down from 2.8% earlier. Commodities such as copper, rubber and iron-ore have meanwhile been commonly used in China for collateral, where traders or investorsborrow against the commodity with the aim of investing Yuan in real estate or sub-prime loans in the shadow banking sector. Some estimates put the portion of inventories of iron-ore that is used as collateral at 40%. Now that Beijing’ is cracking down on shadow lending and weakened the yuan – a deliberate move by authorities – Beijing is trying to push these deals under water. As such, some of these commodities held in storage can find their way back onto the market and weigh on prices. 
China produces as much steel as the rest of the world combined and it’s most actively traded steel futures contract – Shanghai rebar – dropped to a record low of 2,800 Yuan per ton on June 30. That’s down nearly 50% from a record high of 5,450 hit 3 years ago.
Chinese steelmakers suffer from chronic lack of profitability and overcapacity of close to 200 million tons. Despite weak end demand and Beijing’s attempts at consolidation and its crackdown on polluting industries, steel production continues apace because regional authorities are fearful of closing down plants that provide tax revenue and employment. 
In Shanghai, the spot market for iron ore briefly fell below $90 per ton on 16 June, for the first time since September 2012. If sustained below $90 per ton, about one fifth of China’s iron ore miners would be forced to shut down around 80 million tons of output per year.
In contrast, Rio Tinto breaks even at $43 per ton, and BHP stays in the black at $45. Brazil’s Vale’s break even is $75 per ton, due to the greater distance to ship ore from Brazil to China. Iron ore has since rebounded to $97 per ton, but is still trading -23% lower than a year ago. 
The cartel that controls the majority of the world’s rubber production, Thailand, Indonesia and Malaysia has urged its exporters not to sell the commodity below $1.90 or 62.70 Thai Baht per kilo, as the average output cost for growers in Southeast Asia is about 60 Baht. The price of natural rubber is 16% less than a year ago, and at 13,750 Yuan per ton in Shanghai, has lost about two thirds of its value. Stockpiles of rubber at the Shanghai Futures Exchange are at the highest in 10 years, and a global surplus of 241,000 tons is expected in 2014.
Prices for thermal coal are expected to remain weak, with oversupply continuing to plague the market until producers curb output further. Coal prices in Europe and Asia have lost more than half their value since spring 2011, with European physical coal for September delivery was trading at $72.65 per ton, near five-year lows. New-Castle coal prices mined in Australia have also fallen below $70 per ton, bumping along five-year lows, as record output in Q’1 coincided with slowing import needs from China, the world’s biggest coal buyer.
Gold meanwhile is building a base, and eyeing these volatile commodities. History shows that rapid growth of the money supply usually fuels higher rates of inflation. Yet while the Fed increased the size of the MZM Money supply $700 billion in 2013, and $350 billion in the first half of 2014, what has surprised traders is the lethargic behavior of the US’s rate of inflation.
The CPI increased 1.5%, on average, in 2013, and bumped up to 2.1% in May ’14. However, given the -6% slide in the Continuous Commodity Index since the start of July, led by a drop of 20-cents in the price of unleaded gasoline on the Nymex, it’s a good bet that the consumer price index will start to edge lower again, with a lag time of 2-3-months.
Former Fed deputy Alan Blinder explained why the Fed’s QE-scheme didn’t spark an upward spiral in inflation. “The monies the Fed pumped into the banking system didn’t circulate in the US economy. Instead, it all got bottled up in the banks, and essentially, none of it got lent out,” he explained. Because the Fed began to pay 0.25% interest on excess reserves, the banks agreed to park the QE-monies at the Fed itself, instead of lending and creating deposits and increasing the money supply. Therefore, QE didn’t contribute to inflation. And if banks aren’t lending, there’s no boost to the economy. However, there is reason to believe that the $.35 trillion of QE-injections were funneled into the US bond and stock markets.
The meltdown in the yellow metal in 2013 left many gold bugs licking their wounds. However, in hindsight, the collapse in the Continuous Commodity Index (CCI), in the first half of 2013, was probably the biggest contributing factor behind gold’s slide to the $1200 level. And it’s the narrative about low inflation and/or deflation, and weak gold prices that enables the endless printing of money by central banks.
Bubbles in the European and US bond and stock markets can be sustained in the stratosphere, as long as inflation is said to be running near-zero. In fact, the Bank of Japan, the ECB and the Fed all say they must print money to counter the threat of deflation. As for the price of gold, the average break-even point for gold miners worldwide is estimated to be around $1200 per ounce, and it’s this figure, that gold investors believe is the “rock bottom” price for the yellow metal.
Gold bugs have been building a big base of support for the past 12-months, but a sustained rally to $1400/oz and beyond, might require the revival of the “Commodity Super Cycle.”
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Jul 05

Hard Choices

Gold Price Comments Off on Hard Choices
Read Hillary Clinton’s book first? Or just bad-mouth it anyway…?

HILLARY’s smiling face has looked up from the desk for two weeks, writes Bill Bonner in his Diary of a Rogue Economist.
We wanted to read her book, if only to mock and jeer, but we couldn’t bring ourselves to open it. It was too big. Too earnest. Too carefully put together. There would be no surprises.
Like Hillary’s photo on the cover, every detail had been checked by pollsters and approved image consultants. No facts that didn’t support the uplift of the narrative were allowed. No ideas that don’t appeal to the majority voter were permitted.
Hillary is made appear tough, but fair…well-informed…hard working…with a razor-sharp intellect and a heart like road kill on a hot, sunny day: warm, soft and overpowering.
Finally, we had to do our duty, on your behalf, dear reader. We opened the book so you don’t have to. The book, called Hard Choices, is hard to pick up. And easy to put down.
Not because you will disagree with its ideas; there are no ideas to disagree with. Instead, the book is full of self-serving and empty blah blah. It wallows in the glory of the US Empire…and of course, the incredible, gracious tenacity of Hillary Rodham Clinton.
All you have to do is to look at the photos. There you find Hillary shaking hands with every corrupt, incompetent leader the world has to offer…as well as demonstrating all the qualities the dim voter may look for.
In one she is compassionate towards children. In another she is an activist for women. She is a fun-loving secretary of State, too. There’s a photo of her at the piano with Bono. Another of her dancing at a party in Cartagena, Colombia. And there’s Joe Biden whispering in the ear of a giggling Hillary.
What a gal!
The premise of the book is that leaders have to make tough decisions. Her first was her decision to leave a promising career as a Washington lawyer to go to Little Rock and help Bill with his political career.
On the evidence, this paid off. Bill hit it big in politics. Hillary became his partner – like Evita to Juan Perón. Or Christina to Néstor Kirchner. Now, Hillary is in line to be the first woman president.
This seems not only alarming, but also likely…
The Wall Street Journal reported on Wednesday that she and Bill had raised more than $1 billion from corporate donors during their two decades on the national stage. Zombie industries and crony capitalists know Hillary can be bought…and at a reasonable price.
The voters will fall in line. They don’t have a hard choice or an easy choice. Most likely, they will have no choice at all. The Republicans will probably field a candidate with essentially the same policies.
The next hard choice Hillary faced was whether or not to accept President Obama’s offer to head up the State Department. She always says and does the right thing. So she took the job because “when your president asks you to serve you should say yes.”
So far, we are only in the opening pages of the book, and already Hillary is nauseating. She says she’s been doing “public service” for her entire adult life. But what possible service is it? In every post she has held, she was more served than serving.
When she was first lady, for example, who put the bread on the table? Who baked it? Who washed the dishes? Not Hillary!
As secretary of State she says she spent 2,000 hours and flew a million miles. Airborne, at taxpayer expense, she and her friends would “enjoy a glass of wine.” And “watch movies.”
How did the public get anything out of it?
“I didn’t enjoy playing the bad cop,” she says of a conversation with the Israeli prime minister, “but it was part of the job.”
Speaking for ourselves, we didn’t ask her to say anything at all…and we’ll make our own choices, thank you very much.
One of the hardest choices she had to make was whether or not to send Navy SEALs “to bring Osama bin Laden to justice.” In the event, they didn’t even try. They assassinated him on the spot.
But around and around the world she went, a dervish diplomat. Asia, the Middle East, the Far East, the Arab Spring, the Russian winter, the European fall. Blah after blah…well-meaning public servant after well-meaning public servant…human rights, women’s rights, children’s rights. Six hundred pages.
How does she remember so many details? Why does she bother, except to glorify her own mastery of pointless detail?
She says something to somebody who says something else…bumbling from one scene of mischief to another of mayhem. Involving the free and independent citizens of the United States of America in dozens of conflicts in which they have no interest of any kind.
Hillary has been on the government payroll since she was 13 years old, she tells us, when she had a summer job “supervising a small park.”
We don’t know how much supervising a 13-year old can do. But heck, Hillary can do anything. On one page she’s rescuing children from a brothel. On another, she’s cleaning the air. On another, she’s preventing a war.
We are suspicious of people who stay up too late. Stalin worked until 5am. Hitler was a night owl, too. Staying up late is linked to addictions – alcohol, pornography or video games. But over and over, Hillary tells us that she was up until the “wee hours” talking to someone.
Good God, what awful calamity would have happened if she had just gone to bed and turned off her cellphone?
And now, the poor woman must be tired. So many hard choices! So much public service!
She needs a rest. Retire her.
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