Oct 31

Solutions for Everything, Answers to Nothing

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

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
Yo, Larry, Earth calling…Have you ever been to New Jersey?
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
But the fantasy of borrowing for “public investment” soaks the FT.
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
How do you stimulate demand?
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
Nobody knows. But a serious paper would at least ask.
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
But the FT does none of that.
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Mar 06

Zimbabwe’s Gold Reserves Valued at Just $501,390

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Reuters reported that according to Zimbabwe’s finance minister, the country’s only gold reserves are coins valued at $501,390.

Continue reading…

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Jan 24

4 Charts & the End of the Bernanke Bubble

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You think Amazon (Nasdaq:AMZN) can double in value again…?

A LOT of commentators on the scene today – including several of the analysts we employ here at Stansberry & Associates Investment Research – are bullish on the stock market, writes Porter Stansberry.
I am not. I believe that securities prices at some point in the near future will suffer a serious correction. Prices will fall (in terms of earnings multiples) by nearly 50%.
For many readers, this remarkable divergence of opinion has caused a lot of grief. In my mind, it shouldn’t: Sooner or later, intelligent people, working independently, will always disagree about the likely course of future events. The only way all of us at Stansberry could possibly agree all the time would be if some of us were lying.
In any case, most of the bullish case for the stock market today rests on the notion that stock prices are related to bond yields. And since bond yields are so extremely low (even though they may rise a bit), stock prices should go much higher.
Furthermore, since the Fed controls interest rates, and it has promised to keep them from shooting higher, stocks will surely continue to climb. My old friend Steve Sjuggerud labels this broad set of facts the “Bernanke Asset Bubble”.
I’ve agreed with the basic mechanics of this strategy since late 2011, when the European Central Bank decided to join Federal Reserve Chairman Ben Bernanke on the money-printing bandwagon. This massive monetary stimulus helped us achieve fantastic results from the stocks we recommended in my newsletter in 2012 – average returns of more than 22%. But then…in my view…things simply went way too far. I believe three factors will come together to destroy the current bull market. They are easy to grasp.
First and foremost, the Fed can’t make interest rates go any lower – functionally. As I explained in the May 10 Digest, the interest rates on corporate bonds had declined so low, they were unlikely to allow investors to even cover the costs of likely future defaults. You could not realistically expect corporate bond yields to go lower – no matter what the central bank did.
When yields can’t go any lower, they are likely to go higher – sooner or later. Investors buying bonds at those low yields were going to lose a lot of money. I didn’t mince words…
“The US bond market – particularly junk bonds – is going to crash. When this crash occurs, it will be the largest destruction of wealth in history. There has never been a bigger bubble in US bonds.”
The timing of this warning was incredibly accurate. As you can see in the following chart…within days, the corporate high-yield market – as measured by the iShares iBoxx High Yield Corporate Bond Fund (HYG) – fell sharply. And longer-maturity US sovereign bonds – represented by iShares 20+ Year Treasury Bond (TLT) – fell even more. (Remember, when bond prices dive, yields rise.)
I believe these trends will continue. Let me show you why.
Most of the people in the markets today continue to believe that everything happening in the US and around the world is fairly normal. Stocks go up. Stocks go down. Some places are doing well. Some are doing poorly.
It’s part of normal human psychology to ignore massive changes in reality. It’s called the “normalcy bias”. It’s the tendency we all have to believe that everything is going to be all right.
It explains why so many Jews didn’t flee the Nazis when they had a chance. It explains why so many people drowned in New Orleans after Hurricane Katrina.
It’s not that there weren’t plenty of warnings. It’s that we human beings have a hard time believing that tomorrow won’t be pretty much like today. After all, that’s what our experience teaches us 99.9% of the time.
And so…almost every economist or stock analyst you read is simply going to compare today’s interest rates with interest rates back in the 1960s (when the Dollar was still backed by gold, and the US was still a net foreign creditor). He’s going to draw comparison to times when price-to-earnings (P/E) ratios were similar to today’s.
But he won’t mention that never before have 92 million Americans been out of the labor force and effectively supported by the US government at the cost of $1 trillion per year.
In short…judged by other periods in US history…judged against a backdrop of “normalcy,” there’s nothing to worry about.
Nothing, that is, except this…Take a look at the two charts below. They should tell you all you need to know about the likelihood of massive changes in the future. They should tell you whether things are really “normal.”
The first chart shows you the simple, nominal, increase in the size of the Federal Reserve’s balance sheet. It’s something straight out of Weimar Germany…or the last 20 years in Zimbabwe. This kind of gross, out-of-control experiment with the world’s reserve currency has never happened before. No one can predict the outcome. Not me. Not anyone else. But it sure as hell isn’t normal.
The second chart gives you some useful history. Comparing today’s economy with the economy of 20 or 30 or 40 years ago is meaningless. What does today compare to?
The chart shows the amount of money that’s being printed as a percentage of gross domestic product (GDP). And there are only two comparable examples in the last 200 years: the Civil War and World War II. Now…just ask yourself these questions…do today’s securities prices make sense given the amount of instability and uncertainty in the world’s dominant currency, which underlies the entire global economy?
Amazon is a truly amazing company. It has, along with a handful of other internet companies, transformed the entire retail industry. It is, undoubtedly, a valuable brand and a valuable company. But…
Do you think a private company that’s valued at almost $200 billion can really increase in value by 50% in a single year? Do you think that any private business – which must face constant competitive pressures – is really worth 56 years of operating cash flows or 150 years of earnings?
No business in history has ever deserved to be worth this much…and certainly not an Internet retailer. Retailing is an absurdly tough business. It’s akin to business suicide. Amazon – the most dominant Internet retailer in the world by a huge margin – produces a return on equity of only 1.5%. And yet investors are paying 20 times book value (today) to own this stock. I doubt those investors are going to do well over the long term…
My point is…the Bernanke Asset Bubble happened. The Fed printed a truly stupendous amount of money. It bought trillions of Dollars’ worth of US bonds. It produced a huge bubble in corporate and US sovereign bonds. It forced investors out of the bond markets and into stocks. It drove up equity prices to absurd heights – that rival even the 2000-era prices for certain stocks.
What happens now?
You might try to catch the tail of this bubble. There might be a “blow-off top” – a huge, manic run in securities prices. I certainly can’t predict the future. But from what I see…the selloff in bonds has already begun. Meanwhile, many stocks are trading at crazy prices already – truly insane levels. Normally, these kind of sky-high valuations have painful consequences for investors who buy at or near the top. And this time…I fear the consequences could be far, far worse than even I am able to imagine.
What were the valuations of good businesses during the previous periods in US history when the Fed was printing similar amounts of money? No, we’re not fighting a Civil War. No, we’re not fighting a global war against fascism. But our monetary authorities are fighting a desperate war – a war to save the existing sovereign debt markets…a war to bailout all the world’s largest governments…a war to save the US Dollar…a war to prevent a social collapse…a war to save themselves. It’s a war they cannot possibly win.
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Nov 07

The Idea of Americas

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The United States is no more united, or unique, than anywhere else anymore…

ARE WE at the beginning of another bubble in stocks? asks Bill Bonner in his Daily Reckoning.
Maybe. US stocks are already far more expensive than those of most other nations. And the steady flow of QE (quantitative easing) buying – $85 billion a month – seems to be having an effect in only one place – stocks.
Since the economy is NOT responding, we expect the Fed to continue…and eventually become more desperate and more aggressive. If this bull market holds together until then, it could easily turn into a real bubble market – like Zimbabwe at the height of its hyperinflation.
Stay tuned!
We drove up from New York to Burlington over the weekend. As we headed north, the leaves disappeared. Golden, brown, and yellow in Maryland, few are left on the trees here in the Green Mountain State.
Albany, we noticed in passing, calls itself the ‘All America City’. How could a city be ‘All America’, we wondered? The country is too big…too varied…too much for a single city to represent.
American flags festooned barns…and flew over trailer parks and shopping malls…all the way from Baltimore to Burlington. We were on the road more than 10 hours…cruising in our Ford pickup…and were still on American soil.
But accents changed. The landscape changed. Even the cars that people drove changed. Here, there are more Subarus than F150s. The people dress differently too – in flannels, carharts, and hiking shoes. And they send Bernie Sanders to the US Senate. What kind of strange people would do that?
Here is the Senator, alarmed about the Tea Party:
“These people want to abolish the concept of the minimum wage, they want to privatize the Veteran’s Administration, they want to privatize Social Security, end Medicare as we know it, massive cuts in Medicaid, wipe out the EPA, you don’t have an Environmental Protection Agency anymore, Department of Energy gone, Department of Education gone. That is the agenda…”
Sounds good to us. What kind of people would elect Bernie Sanders to oppose it?
We don’t know. But they are not our people.
The trouble with ‘patriotism’, besides being a refuge for scoundrels, is that the ties that bind one patriot to another are abstract and largely phony. What we really appreciate about America, for instance, is not the facts of it – they are too diverse – but the idea.
According to a book we authored, The Idea of America, the original concept was that a person in America could do what he wanted…without having to ask permission from the government. That theory made the US different from any other country. That theory still appeals to us. But in practice, America is now much more like everywhere else than different from them. Detroit could be Lagos. Vermont could be Denmark.
“C’mon…don’t be silly,” protests the better half of the family. “Vermont is a state. Maryland is a state. We all share the same federal government and the same history.”
Certainly, the feds provide more or less the same comic bounty to us all. We all suffer Obamacare, the NSA, Congress, the SEC and other federal impositions, more or less in equal measure.
But our histories are very different. In the most dramatic episode in American history, for example, the War Between the States, the Green Mountain Boys of Vermont did their level best to kill our own ancestors.
South of Baltimore, Maryland was on the side of the Confederacy. To this day, many Marylanders still consider Jefferson Davis to have been the best President America ever produced.
We have a sentimental attachment to our homeland. But who could be fond of all of America? It is too big, too diverse, and too abstract. It would be as if you were in love with all the women in your postcode.
Each one may be loveable in her own way. But put them all together and their fetching particularities blend into generalised mediocrity. The slimness of one is contradicted by the fatness of another. The cleverness of a few is offset by the dullness of the many.
And the fair smile of a blond, averaged against the sour frown of so many brunettes, becomes nondescript. You do not fall in love with all women; you fall in love with a single one. Trying to love them all, you are a good lover to none.
“Love afar is spite at home,” said Emerson.
Trying to love Alaska, Florida and other distant parts of the entire United States of America, you are likely to neglect your own real homeland.
America is full of pleasing places…but each one is attractive in its own way. One is hot. The other is cold. One is mountainous. Another is flat. The fast-talking people of Manhattan…the slow-moving folk of the bayou: each may be extraordinary…in its own way. But average them together and you get nothing special.
Our own homeland is the land between the Potomac and the Patapsco, on the West Bank of the Chesapeake. Everything else is foreign. Vermont might as well be in Canada. New Mexico is no different from Old Mexico. And California is a foreign country of its own, as far as we are concerned.
This thought occurred to us as we attended the annual Homecoming Dinner at Christ Church, West River, Maryland. This is the church where our grandparents and great-grandparents were married…and where generations of our forebears lay in the graveyard.
Year after year, for the last hundred years, the family has attended the annual homecoming dinner. The Catholics may throw better spaghetti dinners. The desserts prepared by Methodists may win prizes at the county fair. But when it comes to ‘ersters’ – no people do them better than the low-church Episcopalians of the West River area.
The culture of the Maryland tidewater evolved during the 17th and 18th century and remained little changed until the 1960s. It was based on two things: harvesting the fish and fowl of the Chesapeake…and growing tobacco on its shores.
Captain John Smith, leader of the Jamestown colony in Virginia, sent some members of his team to live with a local tribe of Powhattan Indians in 1609, the Kecoughtan. English settlers needed to learn how to live in the area without starving to death.
The Kecoughtan showed them how to wade out into the bay, onto an oyster bar, and scoop up the delicious bi-valves. When the envoys returned to Jamestown, Smith reported that they had eaten so many oysters “their skin peeled”.
We watched for signs of peeling skin on Sunday. Oysters were ‘packed’ by the ladies of the church on Friday night (padded in a batter) and then fried for the dinner on Saturday. Packing oysters is a social gathering.
The older women show the newer members of the congregation how to do it…and enjoy a lively conversation as the oysters are prepared. The dinner is not explicitly an ‘all you can eat’ affair. But a man with a healthy appetite is offered so many that he feels as though his skin could come off.
English settlers took to ‘oystering’ with such gusto that the beds close to shore were soon depleted. They then took to boats and developed a hand tong to reach down to the seabed and ‘lick’ up the oysters.
Back in the 1960s, we worked in the construction trades, paying our way through college by driving a truck and helping the carpenters.
Oyster season began in September. Since the carpenters were also watermen, they would leave their jobs en masse as soon as the summer heat was over. The company had to prepare for this exodus…scheduling work around it.
Part of the reason the tradesmen returned to the water was just for the joy of being out on the bay. The weather is typically very nice in September, not too hot.
The skies are usually clear, with a mist rising from the warm water in the morning. And there’s a softness to the air…in the creeks and inlets…and the land around it…a gentleness, a mellow haze which we’ve never seen elsewhere.
Oystermen stayed out all day…licking up oysters and drinking down cold beer. They came back in the late afternoon, sunburned, their boats and stomachs full…and happy with what life had to offer them.
The other reason was financial. Oysters were expensive. In a good day, a man could earn $100. Sometimes $200. Far more than he could get for a day on the construction site. In a week, he could put enough in his pocket to buy a used car.
Then, as the season advanced, the oysters thinned out…earnings fell and the men drifted back to work, their shoulders and arms bulging with muscles. Hand tonging was incredibly hard work.
Tobacco farming was hard too. Scarcely three years after the English settlers had waded out into the Chesapeake to collect oysters, John Rolfe arrived with tobacco seeds. By 1670, half the population of England smoked tobacco…with most of the crop coming from Maryland and Virginia.
Tobacco farming does not lend itself to large-scale mechanisation. You can till the land with a tractor-drawn plow. You can plant tobacco, too, seated in a tractor-drawn planter.
But the hard work must be done by hand. Each plant is cut, laid down…and then picked up again and speared onto a tobacco stick, five or six plants to a stick. Then, the sticks are gathered up and hung in an airy barn for drying.
The harvesting is done in late summer – when the heat and the humidity are at their peaks. It was the hottest, hardest work we ever did; it was what convinced us to get a desk job. Under the tin roof of the barn, where the tobacco is hung to dry, it is not only far off the ground; the temperature is off the charts.
Unlike the Deep South, tobacco farms in Maryland were small. Blacks and whites worked together, shared family names, and were often related by extra-marital ties that no one talked about.
The only mark of racial impoliteness we recall was at the water pump. You had to pump the water up by hand and then share out a ladle of cool water. Whites took the ladle first and passed it to the blacks later. Otherwise, we worked side by side, sweating and straining alike, equally miserable in the August heat.
Work often continued until long after dark. The tobacco had to be hung in the barn before you went home. Electric lights in the barn allowed us to keep going…dirty, exhausted, and hungry…until 9 or 10 at night.
The going wage for a 14-year-old boy in the early ’60s…? Five to $10 a day.
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Nov 06

Inflation for Seniors

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Guess who gets hit worst by inflation? Here’s a primer on how to fight back…

As THE POLITICOS in Washington continue to move the deck chairs around on the Titanic, ignoring the monster iceberg in plain sight, I’m keeping my eyes wide open, writes Dennis Miller in his Miller’s Money from Casey Research.
Here are a few tidbits from a recently published Social Security Administration factsheet:
  • An estimated 161 million workers – 94% of all workers – are covered under Social Security;
  • In 1940, the life expectancy of a 65-year-old was almost 14 years; today it is more than 20 years;
  • By 2033, the number of American seniors will increase from 45.1 million today to 77.4 million;
  • There are currently 2.8 workers for each Social Security beneficiary. By 2033, there will be 2.1 workers for each beneficiary.
We can forget about the trust fund when the cupboard is bare. Right now, today, the government collects Social Security taxes from the work force. From those receipts, it pays out Social Security benefits.
In 2010 the Congressional Budget Office announced, “[T]he system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016.”
Baby boomers will retire at a rate of 10,000 per day for the next 19 years, and the gap between Social Security tax revenue and expenditures will grow with each passing day.
Social Security is just the tip of the iceberg. In 2011 USA Today pegged the US government’s unfunded liabilities at $61.6 trillion. That’s $528,000 per household. I doubt most Americans, regardless of their age, have a spare half million to bail out the government. All the wealth of the Warren Buffetts and Oprah Winfreys of our country wouldn’t even make a dent.
The rest of the world knows what’s going on. Historically, other countries have lent us the money to help pay our bills. Keeping our economy in spending mode helped them sell exports to the US and create jobs. That lending is slowing down radically as the world grows concerned about the US government’s ability to pay its bills.
In January, CNS news gave us a pretty shabby report card:
“[T]he Federal Reserve revealed that its holdings of US government debt had increased to an all-time record of $1696,691,000,000 as of the close of business on Wednesday. The Fed’s holdings of US government debt have increased by 257 percent since…Jan. 20, 2009, and the Fed is currently the single largest holder of US government debt.”
If other countries won’t lend us money and our tax revenue is not enough to cover expenses, the Federal Reserve will just keep creating money without much more than a simple accounting entry.
What comes next? You have all heard pundits predict a crash or talk about unsustainable debt. What does that really mean? First, folks depending on the government for income or benefits will take a huge hit. Many Generation Xers (wisely) assume Social Security won’t even be around when they reach retirement age. Any help they get from the government will be icing on the cake. They know the system is unsustainable.
And while the Federal Reserve continues to create money out of thin air, Social Security gets clobbered, and expenses will continue to rise – rapidly. I asked Terry Coxon, a senior economist at Casey Research, what will happen when people catch on. He explained:
“When price inflation starts to become obvious, more and more people will behave as though they are playing a game of Old Maid. They’ll try to get rid of depreciating Dollars. And that effort – to get rid of Dollars before they lose even more value – will make inflation even worse. The players who diversified out of Dollars early will win the game.”
Seniors and savers are particularly vulnerable during periods of high inflation. They worked hard, saved their money, and need it to last. But if their nest eggs are denominated in a rapidly inflating currency, their buying power could vanish virtually overnight. And as their nest eggs shrink, Social Security, food stamps, and government benefits will buy fewer goods and services to boot.
This is no accident, folks. Governments hopelessly in debt create inflation so they can pay their obligations with depreciated currency units.
The big squeeze is coming. It will trap us between rising costs and withering incomes. Carter-era inflation is the closest most Americans have come to what lies ahead. Let me refresh your memory.
  • 1977 – 6.5% inflation
  • 1978 – 7.6% inflation
  • 1979 – 11.3% inflation
  • 1980 – 13.5% inflation
  • 1981 – 10.3% inflation
It wasn’t pretty. Imagine you bought a $100,000, five-year certificate of deposit on January 1, 1977.
The interest rate for the CD was 6%, paid annually, and you were in the 25% income tax bracket. At the end of five years, assuming you reinvested your after-tax interest income, you would have received $24,600 plus your initial $100,000 investment.
Would you have been any better off? No.
Your net return adjusted for inflation would have been $74,100. That’s a 25.9% decline in purchasing power. Inflation would have reduced your net worth by the cost of a well-equipped, mid-size automobile.
Inflation can devastate our standard of living. We know prices are going up. Money doesn’t seem to go as far, but it’s tough to calculate the decline. Still, we know we need to do something.
How can we protect ourselves? Holding assets that historically retain their value is a good start. Gold and precious metals are a prime example. Those who specialize in precious metals like to point out that gold is not getting more expensive; our currency is just losing its value.
Farmland and foreign currencies in countries that are not papering over their debt are also viable sources of protection.
Money Forever subscribers know that we subject our portfolio investments to a Five-Point Balancing Test. Number 4 is: “Does it protect against inflation?” In part, that means investing in companies with a large international base. There are many foreign companies that trade in the US market, and we keep our eyes peeled for the best among them.
When a currency experiences high inflation, no one wants it. In our lifetimes the currencies of Argentina, Brazil, Mexico, and Zimbabwe have become totally worthless. Those who followed Terry’s advice and got out of those currencies early kept a much larger portion of their wealth.
When ultra-high inflation arrives, desperate governments will do anything to protect themselves.  Instituting currency controls that make it difficult, if not impossible, for their citizens to dump a quickly depreciating currency is one of their favorite moves. By then it may be too late to protect ourselves.
The time to discard your Old Maid card and pick up inflation protection opportunities is now. When it comes to protecting your life savings, it is far better to take precautionary steps a year early than one day too late. If you’d like access to inflation-protecting ideas specifically curated for seniors and savers, click here to become a Money Forever subscriber today.
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Oct 16

Yellen at the Fed!

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The wrong woman got the Fed job. Or rather, the right one did…

WE SPENT last week up at the family ranch, high in the Argentine Andes, writes Bill Bonner in his Daily Reckoning.
The ranch was meant to be an investment. It has turned into a social welfare project.
Meantime, checking the news when we got back to an internet connection on Sunday night, we were thrown into the blackest funk when we found that our bid to head the Federal Reserve was rejected.
The phone never rang. The person who never called, of course, was President Obama. So, we missed an opportunity to run the world’s biggest and most powerful central bank. And President Obama missed a chance to put the nation’s monetary house in order.
Not that it would have been easy. Not that it would have been painless. Not that people would have liked it.
Most likely, our plans would have been thwarted, and we would have been assassinated or committed to an asylum for the insane. That’s why we had planned a quick getaway to our ranch in Argentina, where there is no phone…no TV…and, lately, no internet.
The entire system depends on credit. And anything that threatens the flow of credit must be crushed…or ignored. In the event, we were ignored.
Instead, the Prez chose Janet Yellen – the first woman to lead the United States’ banking cartel. But she is not the first woman to lead a major government-sponsored banking boondoggle. That honour goes to Christine Lagarde, who heads the IMF…and who knows even less about what she is doing than Ms. Yellen.
Still, the markets celebrated – sending stocks substantially higher and gold substantially lower. On both scores, we suspect Mr. Market is pulling a fast one, setting up investors for greater losses later on. Stocks were already on the high side…in an economy which appears to be deflationary, depressive and despondent. Ms. Yellen is committed to sending stock prices even higher – with easier credit policies.
We are in risky territory. If monetary stimulus could really make equity more valuable, Zimbabwe would have the most valuable stocks in the world. And here in Argentina, stocks would be moving up nicely too, thanks to a real inflation rate near 30%.
In America’s depressive economy, on the other hand, the most recent trend in consumer prices – as reported by the nerds at the Bureau of Labor Statistics – is down.
No kidding. The last quarter showed falling prices: a disinflationary trend is surely part of the reason that the gold price is slipping.
It’s also the reason that QE, ZIRP et al don’t work. But that’s a long story…for another day.
Gold is a defence against inflation…and financial chaos, and uncertainty. Now, the uncertainty appears to be gone. We know that the Fed will keep to the program set up by Ben Bernanke. It will continue funding the feds’ zombie projects with printing-press money – possibly becoming even more aggressive and ambitious.
Stocks should benefit – in the short run. Speculators should come out ahead. And the rich should get richer (QE and ZIRP are fundamentally transfer programs, not stimulus programs. For example, they increase the value of anticipated streams of income from stocks by reducing the rate at which future cash flows are discounted.)
But if it were that easy to create real wealth, of course, everybody would be doing it. Real wealth – like everything else that is precious – takes time, patience, and forbearance.
You don’t get it by using cheap tricks and economic gimmickry. Instead, you have to pay for it. That is, you have to give something up in the present to gain more prosperity in the future.
The feds’ programs promise the opposite: Americans will get something now…and pay (dearly) later. Eventually – sooner or later – Mr. Market will come down hard on investors’ heads, like a murderer armed with a claw hammer.
But hey…Barack had his chance. And we want dear readers to know that our feelings aren’t hurt. Not in the least. We didn’t really want to be Fed chairman anyway. We just suggested it as a gesture of civic generosity…offering our little mite to help the cause of prosperity and human happiness.
And if Barack et al think the nation would be better off with Ms. Yellen, who gives every indication of understanding absolutely nothing about real wealth in any form, we will line up fully in support of his choice.
We also want Ms. Yellen to know that we will do whatever we can to help her in this difficult job. They have our number.
Really, no hard feelings.
The feds now have the Fed chief they prefer…and they’ll get what they deserve. The bastards.
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Nov 24

Totally Standard Hyper-Inflation

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Hyperinflation is not simply inflation times 10. In fact, it’s when real prices fall…

second-round of quantitative easing, announced on November 3rd, was a shoo-in – a fait accompli – already decided when the policy team first sat down the previous day, writes Adrian Ash at BullionVault.

How come? As the minutes released this week show, Brian Sack – manager of the New York Fed’s System Open Market Account (SOMA) – opened the meeting. And asked to judge the matter, he told the 64 other policy-wonks gathered in the Eccles Building that his team "could purchase additional longer-term Treasury securities at a pace of about $75 billion per month while avoiding disruptions in market functioning."


"Implementing a sizable increase in the System’s holdings of Treasury securities most effectively likely would entail a temporary relaxation of the 35% per-issue limit on SOMA holdings under which the Desk had been operating."

Hey presto! The following day, and after apparently intensive debate, a monthly target of $75 billion in Treasury bond purchases – plus a relaxation of the 35% limit on Fed holdings of any particular bond issue – was announced.

Does that make the Fed meeting a sham? No matter. "It’s not as if the Fed is doing anything radical," says Princeton professor Paul Krugman. It’s simply looking "to boost the flow of economy-wide spending by changing the mix of privately-held assets," agrees Berkeley professor Brad DeLong.

"It buys government bonds that pay interest in exchange for cash that does not. That is totally standard."

But totally standard where, exactly?

Sure, buying and selling government debt in the open-market is how central banks control short-term interest rates. That’s why the Fed Funds rate is a target, and the actual outcome in the marketplace is instead known as the Effective Fed Funds. Bidding short-term bills higher (or lower) in price, the New York Fed thus pushes down (or up) the interest rate paid on those bills. But stuffing the market with money, in contrast, is a very different aim. Not least when you do it by buying longer-term bonds. And by only buying, rather than fine-tuning purchases with sales. And by doing it amid the heaviest net issuance of government debt in history. And by doing it so hard that, despite that record issuance, you still need to break your own limit on the proportion of any individual maturity-date you’re allowed to own.

So again, we ask here at BullionVault: Where in the world is such money creation "totally standard"…?

"I think using quantitative easing is a perfectly legitimate thing to do. And for heaven’s sakes, it’s not as if we’re in any danger of inflation any time soon."
– White House advisor and former director of the Congressional Budget Office, Alice Rivlin, speaking to CNBC on 15 November 2010

"We have no ‘dangerous flood of paper’…On the contrary, our paper [money] circulation, though it shows a terrifying array of billions, is really not excessively high…"
– Vossische Zietung newspaper, 16 August 1922

"Several [Fed policy] participants saw a risk that a further increase in the size of the…monetary base could cause an undesirably large increase in inflation. However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary."
– Federal Reserve minutes from 3 November 2010

"Even if the quantity of money were three times its present size, it would constitute no real obstacle to stabilization…"
– Berliner Börsener newspaper, 18 August 1922

Okay, so pasting a couple of quotes next to each other doesn’t mean the United States is headed straight for wheel-barrows and stormtroopers. Like everyone agrees, 1,000,000% inflation looks a long way off right now. But no central bank ever began a hyper-inflationary policy because it feared inflation. Such disasters always come because of vanished credit and economic depression. And whether in Germany nine decades ago, or in Argentina twenty years back, or in Robert Mugabe’s Zimbabwe around the turn of this century, stuff actually gets cheaper – not more expensive – in real terms during hyperinflation. It’s just that the local currency falls in value faster still, turning the "money illusion" we’re all prey to into a livid nightmare.

Hence the daily flood of French citizens across the border at Strasbourg each day during the early stages of the Weimar madness, emptying the stores with their highly-prized Francs. Hence the real-estate bargains snapped up by wily speculators during Argentina’s last-but-one collapse. Hence the zero-change in inflation – net net – for US Dollar earners during the early phase of Zimbabwe’s hyperinflation, followed by massive a deflation, in US Dollar terms, even as prices in the local currency soared.

On the ground, amidst these crises, it was monetary contraction – not soaring prices – that most worried policy-makers. "The lack of money [now] has a worse effect than the devaluation itself," said one Berlin newspaper in summer 1922, as the Weimar Republic began to run the presses 24/7.

"The government printed notes to satisfy everyone," writes Adam Fergusson in his history of the disaster, When Money Dies, "telling itself that as the granting of credit…had so greatly decreased, the actual currency in circulation had to be so much greater."

But let’s not get perverse. The latest flat-lining in America’s official Consumer Price Index does not mean that hyperinflation is in fact underway. The critical factors to watch out for remain a collapse in tax revenues, plus demands for immediate payment from foreign creditors. It bears repeating nevertheless, however, that – contrary to the worldview presented by academic economists and professional wonks – demand-push inflation is not how hyperinflation begins. Real values in fact fall as a genuine currency crisis takes hold.

And the fact that the Federal Reserve is so dead-set on its "emergency" response that it scarcely needs to meet to agree it, doesn’t mean the Fed actually knows what it’s doing.

Ready to Buy Gold today…?

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Oct 25

Bernanke: A Hole in the Air

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Lies, central banking, and George Orwell…

15 October 2010, Federal Reserve Chairman Ben S. Bernanke delivered a dishonest speech, writes Fred Sheehan in The Daily Reckoning.

What follows is not a critique of the talk, Monetary Policy Tools and Objectives in a Low-Inflation Environment, since that would be redundant. Please see one of my recent articles "Exploiting Bernanke" (September 21, 2010), which discussed the anticipated speech of October 15, 2010.

Bernanke’s mendacious speech confirmed my general investment advice:

"Courses of protection include buying farms (including machinery companies, grain commodity funds, water rights, and desalinization companies), as well as precious metals, mining and drilling companies, and freeze-dried food."

As a guess, Bernanke’s current intention (this will change, and change often) is to add a trillion Dollars to the economy. Such a wild, mad experiment has never been attempted before, outside of Argentina, Zimbabwe, and such.

The reason last Friday’s speech could be analyzed three weeks before it was delivered is Bernanke’s predictability. He will do nothing that veers from the course he found convenient for personal advancement three decades ago. He has neither said nor would dare process a thought that deviates from his doctoral thesis.

Even the title of his latest speech is a lie or stupid, as you wish – broadcasting as he did our "Low-Inflation Environment". Inflation is practically everywhere that counts: food, insurance premiums, utility bills, tuitions. ("Where it counts" does not include the deflation of what really counts: wages, net wealth, house prices. This is why the "inflation vs. deflation" question is false.) Commodity prices keep rising, partially because there is greater demand than supply; partially because we are used to seeing oil and corn quoted in Dollars. Producer and consumer prices generally lag commodity prices. The length of the lag differs. Anywhere from three months to one year captures most instances, under normal conditions. (When further depreciation of the Dollar against commodities is anticipated, the lag will be compressed.) The Dollar has fallen against a basket of currencies by 13% over the past 18 weeks. It is prudent to at least hedge for a contraction of this lag.

Bernanke’s speech was characteristic. He turned logic on its head and ignored the most debilitating consequences of his past actions. The Fed chairman used official government numbers to claim inflation was too low. Homage to government inflation calculations should have, alone, been enough for the media to ignore anything else he said. Of course, he was dutifully quoted and taken at his word.

It was not that long ago when an economist who claimed inflation was too low would have lost credibility. Bernanke stated "that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below." The FOMC is the Federal Open Market Committee – the body that has absolute authority to act upon such inverted thinking as 2% inflation being good for the country.

A step back, to 1957: This was a time when academic economists were learning that theories manipulated to satisfy politicians could put themselves in positions of power. Most from this guild never dreamt anyone outside a college classroom noticed their existence. They miscalculated, as is the rule for these humbugs.

Politicians want money and credit to fulfill their constituents’ every wish. A Harvard economist told Congress that the US needed a 2% rate of inflation to defeat communism. Washington loved him.

On August 13, 1957, William McChesney Martin, the Federal Reserve chairman at the time (and not an economist – he had been a Latin scholar at Yale, so understood that shortcuts destroy empires), lectured the Senate Banking Committee on the specific topic of the Federal Reserve "targeting" (Bernanke’s word – not Martin’s) a 2% rate of inflation:

"Consumers are encouraged to postpone saving and instead purchase goods which they do not immediately need, and the incentive to strive for efficiency no longer governs business decisions…and speculative influences impair reliance upon business judgment."

Of utmost importance, groups struggle to insulate themselves from the loss of purchasing power, then "fundamental faith in the fairness of our institutions and our government deteriorates."

The Bernanke Fed has stated its current policy is to chase consumers out of savings and into speculative ventures. That is exactly the recipe for the Fed to accelerate its impoverishment of the American people. Alan Greenspan, of course, was the master at jumbling a few words to distract attention from this long-running plan to prevent the Fed’s extinction. Bernanke also resorts to nonsense. From his October 15, 2010, speech: a 2% rate of inflation is to "attain…price stability" and to "bring the unemployment rate down significantly." He is doing exactly the opposite of what he pretends

George Orwell wrote about "[t]his lunatic world in which opposites are turned into one another." That was not lunacy for lunacy’s sake, nor is it today.

In 1940, Orwell wrote of World War II: "After 1936, of course, the thing was obvious to anyone except an idiot." He was not erasing his own past, as was common with many others and is universal among "experts" today. (See the first paragraph of Ben Bernanke’s October 15, 2010, speech.) In 1938, upon returning to England from continental Europe, Orwell had written about the…

"familiar streets, the posters telling of cricket matches and Royal weddings, the men in bowler hats, the pigeons in Trafalgar Square, the red busses, the blue policemen – all sleeping the deep, deep sleep of England, from which I sometimes fear that we shall never wake till we are jerked out of it by the roar of bombs."

The bombs flattened London in 1940.

The British institutions in the 1930s were in the same condition that the Federal Reserve, other government manipulators, the so-called economics profession, and the revered think tanks are in today. Orwell wrote of Neville Chamberlain, British Prime Minister from 1937 to 1940:

"He was merely a stupid old man doing his best according to his very dim lights. It is difficult otherwise to explain the contradictions of his policy, his failure to grasp any of the courses that were open to him. Like the mass of the people, he did not want to pay the price either of peace or of war."

At another point:

"Tossed to and fro between their incomes and their principles, it was impossible that men like Chamberlain should do anything but make the worst of both worlds."

This is an apt summation of the desiccated American hierarchy today. It is withering into dust.

Chamberlain had trusted Hitler, as had his predecessor, Stanley Baldwin. As prime minister, Baldwin had suppressed information about Hitler’s rearmament, sleeping, as was his wish, the deep, deep sleep of England. Orwell wrote:

"One could not even dignify [Baldwin] with the name of stuffed shirt. He was simply a hole in the air."

Baldwin did everything he could to prevent any disruption to the exact relations that existed among the social and political institutions of the day.

Winston Churchill, not in office but a nuisance to the established order, knew the proportions of Nazi rearmament and gave speeches in Parliament with uncomfortable details. Baldwin’s cabinet voted to ban "independent views" from the BBC. Sir John Reith, dictator of the BBC, prevented Churchill from speaking. CNBC does much the same today, as does the print media.

Geoffrey Dawson, editor of The Times of London, suppressed Churchill’s views as well as those from Times reporters whose dispatches from Europe might upset Hitler. In 1935, Dawson wrote, "I do my utmost, night after night, to keep out of the paper anything that might hurt their [Nazi] susceptibilities." He wrote this letter because he could not understand the Fuhrer’s ingratitude after, in the words of William Manchester, "five years of jumping through Hitler’s hoops."

Dawson was not a Nazi but a dense, frightened old man who wanted the world to stand still. We can see the same combinations of dis-enlightenment that keep the American public in the dark today. An example is the coordination among government agencies (their data dissemination propaganda) and the Federal Reserve’s contorted views as expressed through the country’s news collection agencies.

The Associated Press released the following on October 14, 2010, a day ahead of Bernanke’s speech:

"Wholesale prices tame beyond volatile food, energy

"(AP) Wholesale inflation stayed tame last month outside of a sharp rise in food and energy prices. Moderate price inflation allows the Federal Reserve to keep the short-term interest rate it controls at a record low of nearly zero, where it has been since December 2008."

With that, the AP assured its access to the Fed chairman.

In 1952, Bernard Iddings Bell wrote Crowd Culture, in which he discussed a wartime incident:

"When Russia was Hitler’s ally in World War II, the American people were told by the papers, and believed, that the Russians were little short of fiends. Suddenly Russia changed sides…[S]he became our ally.

"At a dinner in New York at that time, I sat next to a high-up officer of one of the great news-collecting agencies. ‘I suppose,’ I ventured, ‘now that the Muscovites are on our side, the American people will have to be indoctrinated so as to stop thinking of them as devils and begin to regard them as noble fellows.’ ‘Of course,’ he replied. ‘We know what our job is in respect to that. We in the working press will bring about a complete and almost unanimous volte face in the belief of the Common Man about the Russians. We shall do it in three weeks.’ He was right about it. The papers, fed by the news agencies, did just that."

On March 29, 1943, Life magazine published a "Special Issue USSR". On the front cover is a portrait of Uncle Joe Stalin, beaming downward, as if the dictator is looking upon his 3-year-old nephew who just counted to 10 for the first time. Over 100 pages of the issue describe the Soviet Union’s wholesome leaders and their obliging peasantry.

Among the wholesome leaders is Vladimir Ilyich Ulyanov (Lenin), with a similar, avuncular portrait, as if he’s looking at the same nephew who just counted to 20. The article, "The Father of Modern Russia", starts off "Perhaps the greatest man of modern times was Vladimir IIyich Ulyanov." It goes uphill – or downhill – from there, depending on one’s view.

Flipping through the issue, the article "Collective Farms Feed the Nation" is worth a look. Pictures of the peasants are inspiring. They were a happy lot. The story starts off: "Although Russia was always overwhelmingly an agricultural country, most Russians used to go hungry."

Later in article: "Whatever the cost of farm collectivization, in terms of human life and individual liberty, the historic fact is it worked." The cost of farm collectivization included several million Ukrainians who had been starved to death in the early-1930s.

"Collective Farms" could be written by an economist – then or now – without irony or conscience. Such a contortion of reality would do wonders for a rising academic or Federal Reserve staffer.

Orwell was harsh in his criticism of the intelligentsia, whose loyalties were as fickle as their abstractions. He did not confuse the term, intelligentsia, with intelligence. It was a collection of layabouts who, in a "desire for psychological escape" indulge in "chauvinistic sentiments that would be totally impossible if you recognized them for what they were." Such a person is "capable of the most flagrant dishonesty, but also – since he is conscious of serving something bigger than himself – unshakably certain of being right."

In their world: "Material facts are suppressed, dates altered, quotations removed from their context and doctored to alter their meaning." Communism was an outpost for many of the intelligentsia in the 1930s. John Reed, author of Ten Days That Shook the World (about the Russian Revolution), had willed the publication rights of his book to the British Communist Party. Reed died in 1920. The British Communist Party did exactly what Moscow wanted: it published an edition that excised Leon Trotsky’s role in the revolution and deleted an introduction by Lenin.

Orwell wrote: "Events which, it is felt, ought not to have happened are left unmentioned, and ultimately denied." British Communists were badly shaken by the Russo-Nazi pact (Molotov-Ribbentrop) in 1939, an eventuality not difficult to forecast by a party whose subservience to Moscow should have animated its consciousness towards Russian self-interest.

Bernanke, the Fed, and the other weary institutions fall within Orwell’s description of Chamberlain and his circle:

"What is to be expected of them is not treachery or physical cowardice, but stupidity, unconscious sabotage, an infallible instinct for doing the wrong thing. They are not wicked, or not altogether wicked; they are merely unteachable. Only when their money and power are gone will the younger among them begin to grasp what century they are living in."

Of Bernanke today, he is a combination of both the establishment and the regimented intelligentsia that has acquired power. Orwell wrote of the intelligentsia:

"Clearly there was only one escape for them – into stupidity. They could keep society in its existing shape only by being unable to grasp that any improvement was necessary"

After a time, which looks like it will be after Bernanke and his comrades have done their worst, a leader, looking at the world as it is, may state:

"Difficulties began to build up in the economy in the 1970s, with the rates of economic growth declining visibly…A lag ensued in the material base of science and education, health protection, culture and everyday services. Though efforts have been made of late, we have not succeeded in fully remedying the situation. There are serious lags…in the improvement of the people’s standard of living."

Thus spoke Mikhail Gorbachev in his 1986 speech to the 27th Communist Party Congress when he effectively declared the institutions which had colluded to bankrupt the nation’s economy and spirit were dead.

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