Ben Bernanke has done gone and went insane

Friday, November 20th, 2009 | Economics | Permalink | No Comments |

Karl Denninger - Open Letter To The Chinese Premier:

Dear Wen Jaibao:

We in America have noted with concern your nations’ expression of alarm at our Federal Reserve’s blatant money-printing, debt monetization, and interference in the free markets, in particular the recent commentary of China’s bank regulator cited here:

“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”

Mr. Liu is correct, of course.  However, yesterday afternoon Ben Bernanke gave you the finger, first in his speech and then later in the Q&A in which he said:

Nov. 16 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

Donald Kohn, another Fed Governor, erected his middle finger in your direction as well with his comments last night and Yellen added her view this morning in which they also both said “we see no bubble.”  That’s three.

How many more times do you need to be flipped off before you get it: The Fed isn’t going to do what you want, and neither is Obama.  Get over yourself.

On the objective measures the price/earnings multiple of the S&P 500 currently stands at over 130, more than double its previous record and vastly beyond anything achieved even in China’s manipulated and overheated markets.  In short, they’re lying and they don’t care.

Tags: bernanke, the fed

The War on Products Poor People Buy

Thursday, November 19th, 2009 | Economics | Permalink | No Comments |

Reason interview with economics professor Jagdish Bhagwati - Globalization With a Human Face:

Bhagwati: Instead of pandering to union fear, Obama has got to engage them. You have got to help these doubting Thomases confront their fears. He’s got to say that trade with the poor countries is actually helping, not hurting, you. The unions’ main fear is that unskilled jobs are disappearing. They see these jobs being taken up elsewhere where the labor is cheap. But they can’t hold onto these jobs anyway. What they get in return from trade are cheap products that they need as consumers. So free trade moderates the downward pressure on their real wages.

Big portions of the wages of poor workers go toward low quality textiles, for instance. That is well-established. But if you look at the structure of protectionism, if you go and buy something from Anne Klein that’s going to be expensive, but it carries no tariff at all because these high-end designers compete on variety. Tariffs matter where the competition is on prices. So the low-quality items which poor people buy end up carrying higher tariffs than high-end items that rich people buy.

reason: So free trade’s harm to union workers as producers is minimal, but the harm to them as consumers would be very great if we didn’t have free trade?

Bhagwati: Yes. So what President Obama has to do is basically change the ethos in this country so that it understands that the United States has profited enormously from free trade. Free trade has rescued India and China from poverty, yes. But the U.S. working class has also profited from international trade.

Previously -  The War on Food Poor People Eat

Delicious free lunches for banks

Thursday, November 19th, 2009 | Economics | Permalink | No Comments |

Arnold Kling - Thoughts on the Macro Paradigm:

At this point, I was cornered. I had no choice but to say what I really believe about what the Fed was doing. In spite of all the sophisticated rhetoric about “quantitative easing” and “new tools for monetary policy,” the only way that I can understand what the Fed was doing is to say that the goal was to stimulate bank profits, not the economy. If your goal were to stimulate the economy, you would inject enough reserves to do that and not pay interest on reserves. That might require buying some long-term bonds or mortgage securities, but not the hundreds of billions that the Fed actually bought.

Everything the Fed has been doing over the past fifteen months makes sense if you think of their goal as transferring wealth from taxpayers to banks. If you try to explain it as an attempt to implement an expansionary monetary policy, you won’t even get past my high school students.

Previously - Delicious free lunches for Judge Elihu Smails

Tags: free lunches, the fed

Money trouble in Big China

Tuesday, November 17th, 2009 | Economics | Permalink | 2 Comments |

Telegraph - China has now become the biggest risk to the world economy

“The inherent problems of the international economic system have not been fully addressed,” said China’s president Hu Jintao. Indeed not. China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.

While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. “I’m more worried about deflation,” he said.

By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – “stealing American jobs”, says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.

Tags: china

Inflation or deflation? Jesse’s Cafe Americain says “selective inflation”

Tuesday, November 17th, 2009 | Economics, Photos | Permalink | No Comments |

Jesse’s Café Américain: What is a “Nominal” Stock Market Chart Versus a “Deflated” View?:

“Oh this is all very well and good Jesse, but when I go to the grocery store or to the gas station or the convenience store to buy my instant Lotto tickets I pay in dollars and not gold or euros.”

Yes, but when your suppliers go to buy their goods that are imported, they pay in dollars that are depreciating. You know that some prices are moving higher despite slack demand overall. This is what we call ’selective inflation.’ This is how it starts.

P.S. Something related to this that I’ve noticed is the rise in Nikon lens prices over the past year. Nikon is based in Japan, so everything they make is ultimately denominated in yen. Even with a lousy economy and slack demand, Nikon lens prices in the U.S. have increased due to a dollar that’s deteriorating relative to the yen. This is the NexTag price chart for the Nikon 70-300mm VR showing rising prices (red is maximum, black is median, blue is minimum):

Previously - Inflation or deflation? Noriel Roubini says “deflation now, but maybe big inflation in a few years”

Tags: inflation

Dude, sorry to hear it

Monday, November 16th, 2009 | Economics | Permalink | No Comments |

Vietnam Dong Evaporates.

Real estate insanity in Canada and India, too

Tuesday, November 10th, 2009 | Economics | Permalink | No Comments |

America Canada - Deflation or Inflation. What’s in the Cards for Canada?:

Canada’s home prices have skyrocketed in this recession. When the dollar was at 97 cents US a couple weeks ago, average Canadian home prices hit roughly $320,000 US – an all-time high. Residential mortgage debt has over doubled since 2002. We will surpass the US in per capita residential debt within the next year. In 2009 alone, we will add 100 billion in fresh residential mortgage credit (equivalent of about 1 trillion in the US on a per capita basis).

The average price of a detached Toronto home has approached $600,000. I have attached a home listed at $559,000. The home is about a 15 minute drive from downtown in an average location. It is clearly overvalued. Yet it’s more than likely that the property will receive 20-30 bids and finally sell at over $600,000.

iTulip - Houses in Canada 2 to 3 times as expensive as U.S.:

I hope readers took note of that 1500 square foot old shack on the 30 front-foot lot in Vancouver: $989,000.

From some people with experience in Canada:

Based on my weekly research, in the GTA (accessible to the subway via a 10min. bus ride) a semidetached (3bdr/1.5bath) goes for around $450K, while a detached starts at around $600K/$650K. That is for a 1960/1970 built house in average area, with average repair to be done.

Another story:

I was in Vancouver visiting family in September and was *shocked* at the price of housing up there. As the article points out, prices are sky high and incomes are not nearly high enough to cover debt service. My cousins live in Burnaby, just 15 minutes east of downtown Vancouver. In addition to my cousin, his wife and two daughters, they have 4 other roommates to cover rent. I would guess the house is valued at close to $1,000,000 CAD although they are renters and do not own the home. I’m not sure if the roommate situation is the norm, but that seems about the only way to afford housing if you are a normal person. In any case, I definitely came away with the impression that there is a massive real estate bubble in greater Vancouver.

And in India:

Housing in India serves as a vehicle for the class that doesn’t pay tax (”Black Money”) to hoard its wealth. Ergo, due to massive income inequalities and rampant corruption/tax evasion, housing in India will always be much more expensive relative to income than in the West.

Bombay (Mumbai) is a good example of that. Prices there have been out of the reach of the vast majority of people for generations. And yet, despite massive corrections at various times, they continue to be at levels that even middle class people cannot afford (let alone the poor).

When I wanted to buy land in India, I was told that some 85 percent of the price had to be paid in hard cash (Black Money). This sum would not show up on any property deed and would not be the amount at which the transaction would be registered with the land registry for stamp duty purposes. I refused to do it. I managed to find a seller who agreed to accept the entire amount by bank draft. However, that was a rare exception.

Tags: mortgage mess

California Uber Alles

Wednesday, November 4th, 2009 | Economics | Permalink | 2 Comments |

Ride Fast - The California Way - Stealing from the wage earners:

As of yesterday, California is stealing an additional 10% of wage earners pay, by pre-deducting today your future taxes of tomorrow. They say it’s all wonderful and rainbow, unicorn farts, cause you’ll get the money back.

Ah, no, you won’t. They won’t be paying interest. And since they didn’t ask, it’s stealing. I say they’re breaking the law by not passing a tax increase. Borrowing isn’t a tax increase, they say. Raising fees on everything isn’t a tax increase, they say. I call bullshit on that.

In California the notion of government by the people, of the people, and for the people is dead. It’s now the people working to pay for the government.

How bad is it in California? It’s so bad the L.A. Times finally admits California taxes are too high:

These folks pulling up stakes and driving U-Haul trucks across state lines understand a reality the defenders of the high-benefit/high-tax model must confront: All things being equal, everyone would rather pay low taxes than high ones. The high-benefit/high-tax model can work only if things are demonstrably not equal — if the public goods purchased by the high taxes far surpass the quality, quantity and impact of those available to people who live in states with low taxes.

Today’s public benefits fail that test, as urban scholar Joel Kotkin of NewGeography.com and Chapman University told the Los Angeles Times in March: “Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California. Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California’s government and the middle class is constantly being renegotiated to the disadvantage of the middle class.”

Tags: california, youtube

Gold hits another all-time nominal high of $1,088 Nov. 3

Tuesday, November 3rd, 2009 | Economics | Permalink | No Comments |

Bloomberg - Oil Rises as Gold Climbs to Record on Bank’s Bullion Purchase:

Gold futures for December delivery rose $30.90, or 2.9 percent, to $1,084.90 an ounce on the Comex division of the New York Mercantile Exchange, a record settlement price. The contract touched $1,088.50, the all-time high intraday price. The previous record was $1,072 an ounce, set on Oct. 14.

Previously - Gold hits another all time nominal high of $1,059 Oct. 7

Tags: gold

GDP grew at 3.5% - the recession is over!

Thursday, October 29th, 2009 | Economics | Permalink | 1 Comment |

Tags: bernanke, this is me being sarcastic

Inflation or deflation? Noriel Roubini says “deflation now, but maybe big inflation in a few years”

Wednesday, October 28th, 2009 | Economics | Permalink | No Comments |

Index Universe - Nouriel Roubini: Big Crash Coming:

IU.com: When you say “stay away from risky assets,” many people hear that and think, “Aha, gold!”

Roubini: I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.

Tags: gold, inflation

Inflation or deflation? Terry Coxon says “Inflation, but later”

Saturday, October 24th, 2009 | Economics | Permalink | 1 Comment |

Zero Hedge - Guest Post: When Will Inflation Really Hit Us?:

Previously - Inflation or deflation? The man with the dollar printing press says “inflation”

Tags: gold, inflation

Inflation or deflation? The man with the dollar printing press says “inflation”

Tuesday, October 20th, 2009 | Economics | Permalink | No Comments |

People are debating whether the United States is going to experience inflation or deflation. Ben Bernanke, the chairman of the U.S. Federal Reserve bank, has always intended to fight any hint of deflation with a massive dollar printing campaign. It’s hard to see how he can avoid overshooting attempts to stop deflation and crossing over into inflation.

Bernanke’s plan is a matter of public record since his time as a Federal Reserve governor before taking the reins of the Fed from Alan Greenspan in 2006. This speech is available from the the Federal Reserve archives (my emphasis in bold):

Remarks by Governor Ben S. Bernanke

Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure “It” Doesn’t Happen Here

As I have mentioned, some observers have concluded that when the central bank’s policy rate falls to zero–its practical minimum–monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

The Fed has targeted and maintained an effective zero percent interest rate since December, 2008, forcing itself into a liquidity trap. Continuing from the 2002 speech:

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Gold has risen from $300 in 2002 when Bernanke gave this speech to $1050 today. Gold prices rise when there is public mistrust of government fiscal and monetary policy, and when people expect the money supply to be inflated on a large scale.

Issuing more dollars makes each dollar worth less. It isn’t so much that gold is going up, but that the value of and demand for dollars is falling. This is a difficult idea for most people: we tend to think of prices of things going up and down in dollars. You also have to realize that the price of dollars goes up and down in terms of things - gold, land, stocks, etc. During inflation dollars are worth less so it takes more of them to buy those things. Continuing from the speech:

Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.

And in fact the Fed is now engaged in a massive open market purchase of U.S. Treasury and agency debt. Without those purchases the U.S. would be at the mercy of domestic purchasers and foreign governments to buy the $7 trillion in debt we sold in fiscal 2009, which included $1.4 trillion in new debt. All is going according to Ben’s plan. See Federal Reserve has bought 100%+ of 2009 mortgage market. Continuing:

Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers.

Which fits well into the theory that today’s high stock prices are caused - not by fundamentals or earnings, which are in the toilet - but by an excess of dollars floating around and chasing those stocks. See More on the Federal Reserve’s effect on stock markets.

And if you’ve ever wondered why people call him Helicopter Ben:

A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

Previously - Inflation or deflation? How about hyperinflation

Tags: bernanke, inflation, the fed

Inflation or deflation? How about hyperinflation

Monday, October 19th, 2009 | Economics | Permalink | No Comments |

W.C. Varones quoting John Mauldin:

“There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures.

“According to the current Office of Management and Budget (OMB) projections, US federal expenditures are projected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion and $1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively.

Got gold?

Previously - Inflation or deflation? Shadowstats says “inflation”

Tags: gold, inflation

Cali. pension fund admits board member took $50 mil. in fees to make bad investments

Thursday, October 15th, 2009 | Economics | Permalink | No Comments |

Wall Street Journal - Calpers Rocked by ‘Pay to Play’:

America’s largest public-pension fund, Calpers, revealed that a former board member had reaped more than $50 million in fees for arranging investments that could saddle state taxpayers with hundreds of millions of dollars in losses.

The disclosure deepens concerns that alleged conflicts of interest are undermining state retirement funds.

The California Public Employees’ Retirement System said it is launching a “special review” into payments by money managers — including billionaire Leon Black’s Apollo Management LP — to firms including Arvco Financial Ventures LLC. Arvco is headed by Al Villalobos, who served on Calpers’s board from 1993 to 1995.

Via W.C. Varones, who has a roundup of his past coverage of the California pension fund’s malfeasance.

Previously

• CalPERS actuary says pension costs “unsustainable”
• California pensions loses 23% of assets, managers get millions in bonuses
• CalPERS plans riskier bets to recoup losses on previous risky bets
• California pension funds lose $100 billion in a year

Tags: pensions, unions

Inflation or deflation? Shadowstats says “inflation”

Wednesday, October 14th, 2009 | Economics | Permalink | 1 Comment |

In comments to Inflation or deflation? No deflation since U.S. left gold standard in 1971 someone comments that we’re seeing deflation this year, leading to things like the lowering of the minimum wage in Colorado.

Except that we’re not seeing deflation this year. We’re still seeing inflation. Here’s why.

The government’s formula for calculating inflation was changed in the Clinton era to reduce reported inflation. Carter and Reagan had made small adjustments that likewise had reduced reported inflation. It’s to the government’s benefit to underreport inflation, because the official Consumer Price Index figure contributes to Social Security benefit increases, automatic government employee pay raises, etc.

That change in the CPI formula makes the current CPI discontiguous with the historical inflation/deflation chart shown here because you’re talking apples and oranges. You can’t compare official government CPI figures for 1950 and 2009 because the formulas for calculating CPI were different in those time periods.

Enter Shadowstats.com. They run current data to calculate CPI using the pre-Clinton formula. Using the pre-Clinton methodology we’re still at 2% inflation, not the official 2% deflation figure.

Previously - Inflation or deflation? No deflation since U.S. left gold standard in 1971

Tags: inflation

Barrick’s issues more stock to pay off gold hedges

Wednesday, October 14th, 2009 | Economics | Permalink | No Comments |

Barrick’s is the world’s largest mining company. They seemingly went from offering a gold hedge to hedge against lower gold prices to massively shorting the gold market. With gold on a huge upswing they had to sell stock last month to close some of their short positions so they weren’t wiped out. With gold rising, they’re forced to sell even more stock.

The Golden Truth - American Barrick Issues $1.25 Billion In Debt To Further Reduce Gold Hedge

With the ink barely dry on its $4 billion stock deal, American Barrick (ABX) announced a surprise debt deal to raise another $1.25 billion in order to further reduce its gold hedge book.  The stock deal was used to extinguish Barrick’s $3 billion fixed-price hedges plus some of its floating-price hedge exposure, incurring 10% shareholder equity dilution and a $5.6 billion charge to earnings.

I hate to burst the egos of gold market analytic geniuses like Jon Nadler, Jeffrey Christian and Robert Prechter (note: sarcasm intended) - all three of whom believe the gold market has topped and likely to crash - but as a betting man I like the odds of placing my chips on the view of the people running the world’s largest gold mining company rather than three stooges who provide useless investment advice and don’t invest a nickel of their own money in the markets.

Tags: gold

Inflation or deflation? No deflation since U.S. left gold standard in 1971

Friday, October 9th, 2009 | Economics | Permalink | 6 Comments |

Areas of the chart in purple are inflation. Areas in red are deflation.

In 1971 Richard Nixon closed the gold window. U.S. dollars could no longer be converted to gold. There was no longer a relationship between dollars and gold. The U.S. was off the gold standard. Since then we’ve never experienced a sustained deflation.

That’s been the consistent argument of iTulip founder Eric Janszen. See his article, The truth about deflation:

There were a very brief few months of deflation after WWII as the government attempted, Paul Volcker style, to wring inflation out of the post WWII economy. But note the deflation scale in this post-Bretton Woods period has now changed from the post-gold standard era where deflations exceeded 30% in some periods. Since then, no more 30% deflations. Rarely, for short periods when deflation has happened since Bretton Woods deflation has only once exceeded 10% in one month and has generally been limited to less than 5%.

Take-away: No gold standard, no deflation spirals. Ever again.

I tend to agree. It seems like once you can print worthless toilet paper money to your heart’s content there’s no reason to have deflation.

Tags: gold, inflation

Gold hits another all time nominal high of $1,059 Oct. 7

Friday, October 9th, 2009 | Economics | Permalink | No Comments |

MoneyWeek - Gold hits an all-time high - yet no one’s interested:

I remain among my ‘cleverer’ friends (some of them owned Northern Rock) the eccentric who bought gold. I am still waiting for the day when they come to me asking for mining tips. Long may it be before they do so.

In any case, it’s important to enjoy the moment – we often forget to. But, come the morning after, as our wizened man from the 1970s will tell you, one would advise some caution. Gold has made a daily close at all-time highs, but we need to see a couple of weekly closes above this level to confirm things.

As I’ve often said, I still expect gold to go a lot higher in the longer term – at the moment I expect $1,400 by spring 2010. But it won’t get there in a straight line, and for now, the positions taken by the futures traders on the Comex suggest a top. If stock markets do turn down, they will take gold and gold stocks with them.

I originally said I’d buy gold after it went down a bit. Then I relented and bought my first gold ETFs in my 401K retirement account just below $800/ounce. I bought more in the $800s, then more in the $900s. I’ve picked up a bit more at the over-$1,000 price based on bullish trends. The upside potential seems much greater than the downside risk.

I’ve diversified my purchases into different ETFs - GLD, GTU, CEF, and lately all of it in SGOL (Swedish Gold ETF, which promises 1/10 ounce physical gold held in reserve for every share). GTU has performed the worst of the bunch, so I’ve reduced my holdings in it to almost nothing.

Note that gold investments are taxed at the higher collectible tax rate rather than the normal investment tax rate. I do almost all of my investing through my tax-protected 401K (more on that later), so it doesn’t matter to me, but it might matter to you. Consult a financial adviser or CPA for tax implications.

At this point silver may increase even more rapidly than gold. It has roughly doubled in less than a year. The CEF ETF includes some silver exposure. I also hold the SLV and SIVR ETFs. With ETFs diversification is good (see below).

Don’t forget energy stocks. There’s currency, there’s precious metals, and there’s oil and other energy equivalents. The last two are real. Everything else that’s based on paper and promises are potentially phony.

Speaking of which, for warnings on the SLV ETF see here. For very serious warnings on leveraged (AKA Ultra) and inverse ETFs see here. ETFs aren’t completely real - they’re based on markets and paper, too. For precious metals it’s always best to own the real stuff to eliminate counterparty risk. As always, my amateur investment advice is worth exactly what you paid for it. Caveat non-emptor.

Previously - Gold hit an all time nominal high ($1,008) on Sept. 30

Tags: etfs, gold

China moves to become a global currency

Thursday, October 8th, 2009 | Economics | Permalink | No Comments |

Telegraph - China calls time on dollar hegemony

You can date the end of dollar hegemony from China’s decision last month to sell its first batch of sovereign bonds in Chinese yuan to foreigners.

Beijing does not need to raise money abroad since it has $2 trillion (£1.26 trillion) in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency.

“It’s the tolling of the bell,” said Michael Power from Investec Asset Management. “We are only beginning to grasp the enormity and historical significance of what has happened.”

Continue reading the rest of this post right here ›››

Tags: china, gold, inflation

Ayn Rand

Wednesday, October 7th, 2009 | Economics, Political Survival Kit, Quotes | Permalink | 4 Comments |

“When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing — when you see money flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and pull than by work, and your laws don’t protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice, you may know that your society is doomed.”
– Ayn Rand

I’ve picked up a couple of Ayn Rand novels and couldn’t stomach them. Occasionally I’ll read something like this and cheer, but wonder how the author of that snippet is the author I tried to read.

I looked up that quote. It’s apparently from Atlas Shrugged, and is part of the so-called “Francisco Money Speech.” That nugget above is buried in the ore of a long-winded polemic that no one could speak, much less listen to in its entirety. But that nugget really is golden.

Leveraged buyouts and “Railroad Tycoon”

Tuesday, October 6th, 2009 | Economics | Permalink | No Comments |

FIRE players suck the life out of a real company:

This brings to mind a computer game, Sid Meier’s Railroad Tycoon, that I used to play in 1990 or thereabouts that in retrospect did a surprisingly good job of modeling how LBOs really work. In the game, you could buy a majority of your competitors’ stocks and then transfer the company’s cash to your company. After looting your competitor of his cash, you would sell just enough stock so that you no longer had a controlling stake. The competitor would then be independent and, lacking cash, would take out a loan from a bank. Upon being recapitalized, you could quickly buy enough company stock to again take a controlling stake in the company and clean out the coffers. Lather, rinse, repeat until the company can no longer service its debts from its operations and is thus considered untouchable by the banks, declares bankruptcy, and disappears from the game (make sure you liquidate all stock before it hits zero).

Another interesting side effect of this mini-game within the main game of building a railroad empire is that you could achieve a monopoly without ever having built a true railroad. I remember being able to win the game quite regularly having only built maybe 100 miles of track and not even having any trains. This also mirrors Wall Street’s impact real-life on the United States — a lot of wealth is transferred, absolutely nothing is created, and otherwise useful companies are destroyed.

One final, disturbing (perhaps prophetic) note about the Railroad Tycoon. Upon ending the game, you would be rated on your performance based upon your company’s net worth and its dominance of the railroad industry by giving you a numeric score and job title. Despite only having built 100 miles of track and preventing my competitors from really building anything either, I would end the game with the highest job title in the game: “President of the United States of America.”

Previously - Learning economics on the Monopoly board

Bush administration, Federal Reserve lied about banks’ health in 2008

Monday, October 5th, 2009 | Economics | Permalink | No Comments |

ABC News - Government Watchdog Says Treasury and Fed Knew Bailed-Out Banks Were Not Healthy:

The Treasury Department and the Federal Reserve lied to the American public last fall when they said that the first nine banks to receive government bailout funds were healthy, a government watchdog states in a new report released today.

The bailouts and the stress tests were a joke. Most banks are insolvent and are being propped up by government money, government backstops, and government regulators looking the other way.

Tags: bailout, banks, mortgage mess

Guess which carmaker is worried sick about the future?

Saturday, October 3rd, 2009 | Economics | Permalink | No Comments |

You’d think it would be Chrysler or GM. Nope.

In a rare example of corporate accountability and humility, the president of Toyota, arguably the best run auto company in the world, Akio Toyoda, had some very harsh words for not just his company’s recent decline, which he characterized as “grasping for salvation”, but for his own failure at prevent this collapse. One wonders when Mr. Toyoda’s American counterparts, whose own failures are orders of magnitude worse, will admit even a minor fraction of comparable culpability.

Tags: chrysler, gm

Gold hit an all time nominal high on Sept. 30

Thursday, October 1st, 2009 | Economics | Permalink | No Comments |

Goldmoney: “An important event occurred yesterday, September 30th. Though it has received little attention, it warrants mention, and for this reason, I now highlight it. Yesterday gold closed on the Comex in New York at $1,008.00. It was gold’s highest ever monthly close.”

That was gold’s highest price in nominal terms (not adjusted for inflation). USA Gold: “The inflation-adjusted price of gold at its 1980 peak is just over $2350 — that leaves a considerable amount of headroom just on the basis of making up for past inflation, let alone the prospect of continued inflation.”

Good times.

Tags: gold, inflation