G. Edward Griffin

Guest Interview

11/29/2009 – with Scott Smith

The editors of the Daily Bell are pleased to publish an exclusive follow-up interview with legendary hard-money historian G. Edward Griffin who has much to say about the economic crisis, the mood of the monetary elite and the effect of the Internet on freedom.

Introduction: Mr. Griffin is a distinguished film producer, author and political lecturer. He is the founder of Freedom Force International, a libertarian-oriented activist network focused on advancing individual freedom. First released in 1994, Mr. Griffin’s best-selling financial book, The Creature from Jekyll Island, is a no-holds-barred look into the inner workings of the Federal Reserve banking system, or cartel if you will. Mr. Griffin peels back the layers of obstruction to rational analysis and leads the reader on a wonderfully researched, although disturbing, journey from the very beginning, when the Fed was still in the planning stages, up to the present, where it is now struggling to survive. For many years, the editors of the Daily Bell have been avid readers of Mr. Griffin’s tremendous literary contributions on free markets and personal liberty. His insights are especially noteworthy given the validity of his vision and the exciting and troublesome nature of the times in which we live.

Daily Bell: Has the stimulus helped? Why or why not?

Griffin: Has the stimulus helped? I guess the question is has the stimulus helped whom? Or What? The general idea is that the stimulus is supposed to stimulate the American economy and help the American people and in that I don’t believe that there is any reason to think that it has helped at all. I don’t think it was really designed to do that at all. It was designed to be sold that way but I don’t think that anyone in Washington thought that it would actually accomplish the end objective. Now I suppose that some people did think so, I would have to backtrack on that, there are some collectivists that believe the government can solve all problems, that the government can take everything from the citizens and redistribute it back to them in a more efficient manner. There are people like that out there and they thought the stimulus package would help. Surely everybody understands that the money that is being spent is coming out of the pockets of the very people it is supposed to help.

Daily Bell: From the central banking mechanism?

Griffin: Yes, the government doesn’t have this money. The government is spending this money but they don’t have this money, and the paradox there is that they are not collecting it from taxes but they are just creating it out of nothing. They are using the Federal Reserve mechanism to create this money out of nothing, push it into the economy and then that results in inflation. The cost of it is born by everybody but it is usually born mostly by the people at the bottom of the economic scale who will feel the effects of inflation the most.

Daily Bell: Modern governments are supposed to take care of the poor, but often it doesn’t work that way.

Griffin: The very wealthy don’t suffer too much from the effects of inflation and the upper middle class get by OK, but the bottom part of the middle class and those who are on limited incomes have a real tough time with inflation. So I am saying the cost of all these stimulus packages are falling on the very people who are supposedly to be helped and not only that, the benefit is not going to those people at all but to the politically favored class, those who are in government jobs or government contracts with the government. It is going to the banks, going to the insurance companies, the big corporations – all who have strong lobbying influence with Washington. The money is coming from the middle and lower class and going to the politically favored class. So is it helping? It is helping the politically favored class a lot, it is helping the politicians a lot because they can posture and grandstand and say we are doing something, we are taking charge here. So it is helping them. But as for helping the economy or the people at large, it is a miserable failure.

Daily Bell: Are we headed toward price inflation?

Griffin: I think we are going to see some continued deflation in the economy, particularly in the bubble sectors. These markets had a long way to contract and I don’t think they are finished. However, it is inevitable that we are going to see price inflation and lots of it. Probably hyper-inflation because the only thing these people in Washington know is how to print more money which almost inevitably leads to higher prices.

Daily Bell: Isn’t price inflation already in the system?

Griffin: Of course it is, particularly in cost of living sectors – food, education and healthcare. Things people have to deal with every day. We are already are seeing price inflation there.

Daily Bell: Price inflation, which inevitably results from the printing of money. …

Griffin: What is interesting when you have a complete understanding about this, is to realize that while they are creating tremendous amounts of money out of nothing and pouring it into the economy through the politically favored class, as I mentioned earlier, at the same time a tremendous amount of money is dropping out of the system at the bottom because of the collapse of real estate values, the loss of savings, the writing off of bad loans, mortgages or writing off a $20k or $30k credit card bill or whatever the debt is. And eventually they go into bankruptcy court and they are cleared of that debt, that money literally goes out of existence.

Daily Bell: So inflation – which is actually the quantity of money – is evening out for the moment?

Griffin: With the fiat money system, money comes in and out of existence and people sometimes forget that fact. So in these economic downturn times, a lot of money is disappearing and at the same time is appearing at the top. The thing to keep your eye on is where the money is going out of the system. It’s coming out of the middle class. These are the people that have lost their savings, have lost the equity in their homes. They have lost all the money that they thought they had in the way of assets, a lot of it anyway. So we see there is money going out and at the same time there is money coming in. It is a transfer of wealth. The wealthy, because of the political connections, are making more and more money and the middle class is literally being squeezed. These guys at the top hope to squeeze these middle guys out of existence.

Daily Bell: Is the power elite running scared?

Griffin: I wouldn’t say they are running scared. I think they are cautious. I think things are unfolding pretty much the way they had anticipated all along. I think these people are smart enough to realize that as we come closer and closer to their New World Order, as they like to call it, the system is becoming more and more a command economy rather than a free market.

Daily Bell: But aren’t people waking up?

Griffin: There is a lot of upheaval going on. I think there is anticipation that there is a lot of waking up going on. But I think they have been preparing for that. I think they are cautious, but I think they fully expect to contain that or possibly turn it to their advantage. For example, if they could encourage rebellion, revolts and riots, that would provide the excuse for martial law. I think the motivation behind their equipping police forces and national guard units with crowd control weapons and the reason they have been building these massive FEMA concentration camps all around the country, is their anticipation of the need for a final crackdown.

Daily Bell: Has the Internet contributed to elite setbacks?

Griffin: I think the Internet has been the most powerful force to set back the plans of the power elite. They hate the Internet, they hate the free exchange of information. You can see the impact all around the world. The totalitarian systems are moving heaven and earth in order to regulate and restrict the free use of the Internet. They want to control it. They can control it. And they are working very hard as we speak to maneuver the legislation so that they will control it.

Daily Bell: How are they going about it?

Griffin: They are trying to sell it to the average person as a good move for the public. They are trying to convince people that if the government doesn’t control the Internet then we will have pornography, people will have their privacy stolen, children will be abused. A lot of people don’t really understand the real issues. They say “oh yeah, naturally we need more and more regulation on the Internet.”

Daily Bell: This is being done independently by governments?

Griffin: Actually, there is a movement afoot for the United Nations to control the Internet. The idea is that international control would be fairer than what we’ve got now, which is a good deal of American control. Of course, most countries don’t make any pretense of respecting individual rights or free-speech. They are totalitarian in nature. The whole world is filled with dictatorships of one kind or another, and these people have no respect for human rights or freedom of speech. You can be sure that if the United Nations winds up in control that the free exchange of information that the whole thing will come to a shuttering stop!

Daily Bell: Not a pleasant thought. But meanwhile, the power elite has other things to occupy itself with. Is it fair to say that the fiat money system is broken beyond repair?

Griffin: No, the fiat money system is all that the world has right now. Of course, it is not working well at all and thus there has been talk of a new monetary system – one that might possibly be backed a little bit by gold or silver. But that’s what they always say to sell it in the early stages. If you look at the people who are making these statements, the Western world leaders, they are enemies of gold and silver. They love fiat money. They want to control it because it’s a means of strengthening their hand over the people. Fiat money is not dead by any means.

Daily Bell: Is there more unrest in the West than the mainstream media suggests?

Griffin: Good question, I don’t know that I am qualified to answer that. My contacts indicate that there is a lot of unrest when you get out beyond informed groups to the people who make up the bulk of the population. But it’s unrest that is not knowledgeable; it’s not based on information.

Daily Bell: What is the trigger, then?

Griffin: It’s based on emotion and envy and anger and I am afraid that that kind of unrest can be used to bring about the very opposite of what we need in this world. If you can manipulate the mobs into being angry, say for example, at capitalism, then you can end up with something even worse.

Daily Bell: Yes, that’s why change has to be non-violent.

Griffin: And it has to be knowledgeable. It’s not knowledgeable to say the banks are failing and therefore capitalism has failed, so let’s try socialism. What’s left out of that argument is that the banks are not functioning within a free-market system. The banks in the world today are a prime example of collectivism. They are in bed with the government. They couldn’t exist without government favoritism and government monopoly. The banks and the government are practically one in the same. That’s not capitalism, that’s not free enterprise competition. But the masses have been told that that is capitalism. So when the collectivist system goes belly up, as it periodically does, then those who are misled can get angry at capitalism, which is the wrong target. I worry about that kind of rising resentment and anger in the world because it is not based on facts.

Daily Bell: Yet understanding of free-markets has taken off in the last decade, thanks to the Internet in large part.

Griffin: Funny, I am thinking that there are two parts in my brain fighting against each other at the moment. On the one hand I want to say something very positive and encouraging because there certainly are strong signs of a growing movement for the free market. But when you look at who is still in charge of the world’s governments and institutions, it’s still a very small component of the larger scene.

Daily Bell: But it is growing? …

Griffin: Yes, it is definitely growing and I believe it has a solid base to it. In fact, I get a great deal of encouragement from that. We just have to keep the fire under it and I think as more and more people become upset with the collapse going on around them, they will honestly start looking for a new way. And thanks to the Internet, many are starting to realize that we haven’t had free-enterprise capitalism, we haven’t had free markets for many years. I’m encouraged by that, but we still have a long way to go.

Daily Bell: We compared the Internet to the Gutenberg press and said the results would be similar. Do you think so?

Griffin: I think that is a good analogy. The Gutenberg press made information available to the masses and the Internet has done the same. Good analogy, yes.

Daily Bell: We’ve spoken about some general threats to the freedom of the Internet. Will the current American administration be able to crack down on the Internet and censor its messages about free-markets and freedom in general?

Griffin: The current administration can do anything it wants to do. That is the answer to the question. They have the political power, the military power and the economic power. They own the economy and they control the military. And the media goes along with everything they want to do. I think they want a crack down, and will try, but they are going to need some kind of an excuse. They are going to need some kind of a major event to justify it.

Daily Bell: Will Ron Paul and his free-market message have an increasing impact on American politics?

Griffin: I believe he will, but I don’t know if it will be because of his personal involvement or this thing that we might call the Ron Paul phenomenon. Ron Paul generated this phenomenon because of his astoundingly excellent position on so many policies and because he ran as a candidate of a major political party which gave him visibility, which he would never have had, particularly with young people. Once that is started, it can’t be stopped really. Once the bell is rung it can’t be un-rung. So I think, even if Ron Paul is not personally involved in any more political movements, that the Ron Paul phenomenon is going to continue to grow.

Daily Bell: We think the conservative movement is desperate to co-opt the libertarian message and has launched a number of artificial candidates to do so including notably Sarah Palin. Agree?

Griffin: I agree that that is a strategy they have considered and would execute if they could. When it comes to particular candidates, I don’t know enough about them. Sarah Palin is very hard to pin down. I don’t know what her political philosophy is. And that worries me, because if someone is offering themselves for leadership, especially in these troubled times, they have to stand up and say what it is they believe in. I am talking about real principles and not just in terms of whether we should or shouldn’t drill oil. That’s an issue, and an interesting issue, but what are the principles, what is the ideology, what is the yardstick that will be used, the guidelines that will be used to make all the decisions that come down the line.

Daily Bell: She comes off as free-market oriented in some ways but not in others. Most notably her ongoing support for the military industrial complex is problematic.

Griffin: I don’t know what her philosophy is. But I have a feeling that what you said is absolutely correct, that they are going to package her as a quote “conservative” whatever that means. Certainly, they are going to package her as a constructive alternative to Obama. Yet when it comes to the real issues like the loss of American sovereignty, the abolition of the Federal Reserve System, important issues like that, we don’t know where she stands.

Daily Bell: We think the American intel establishment is launching more and more conspiratorial and pro-war Internet sites – ones that nonetheless feature free-market rhetoric – in order to confuse the public. Agree?

Griffin: I am not aware of them but it sounds like something they should do. If I was running their strategy, that is exactly what I would do. I don’t know what sites you would be referring to but I would expect that to be the case.

Daily Bell: Will the American establishment media ever get to the bottom of 9/11?

Griffin: The American establishment media will never get to the bottom of 9/11 because they are controlled by the same financial and political forces that seem in some sense responsible for 9/11. I am talking about that cluster of personalities on the Council of Foreign Relations and the people that circle around them. They are the ones that are really calling the shots, not only in the government, but also in the media, educational systems, foundations, etc. The media is as much a part of that group as the government. So I don’t expect to see the media break step with the official position of the government.

Daily Bell: Why did John Farmer, the 9/11 Commission lead litigator, recently come out with a book that basically accused the entire American military, political and industrial structure of lying about what happened on that terrible day?

Griffin: I don’t know, I have not read the book but I am guessing that it might be a kind of decoy to lead people away from the real issue. I suspect that it is part of a decoy. Make a half confession instead of a fuller one.

Daily Bell: Did you ever believe this sort of free-market movement would exist – as it evidently does – within your lifetime?

Griffin: I never questioned whether there would be a free market movement – I was determined to be part of it. That is much of the focus of my work. Yes I did expect to see it.

Daily Bell: Can you list some of your own notable accomplishments – outside of writing one of the best books ever on the Federal Reserve – in aiding this trend?

Griffin: As far as my own work is concerned, others would be better to evaluate how effective that was. I just keep chugging away as best I can.

Daily Bell: What do you believe will happen within the next ten years? Are you optimistic for free markets and freedom in the West and in particular in America?

Griffin: I divide my view into the short view of history and the long view. I have to be honest and say in the short run that I am very pessimistic. I believe that the forces that brought us to this situation are firmly in control of the systems of the world right now. I don’t think we are going to see a turn around in the short term.

Daily Bell: You are speaking of governmental forces?

Griffin: No, I’m not just talking about the political structures, but about the media centers and the educational systems and the labor unions, the church organizations. All the great power centers where people have their leaders and derive their opinions. Those are now all firmly in the hands of collectivists who have this single goal of establishing a new world order based on the model of collectivism.

Daily Bell: You see it as very pervasive.

Griffin: They are in charge. Anyone who thinks we are going to turn that around quickly, well, I don’t think he or she is being realistic. But that does not mean that the long view cannot be favorable. I’m much more optimistic in the longer term. There’s no way to stop this thing in my view. They can stop some of us, but they can’t stop all of us. The ideas cannot be stopped. Once people understand the truth, they are not ever going to easily forget it.

Daily Bell: You’ve done a great deal to help with that effort.

Griffin: All of us together are building a movement where an understanding of free-enterprise and free-markets is reaching the point of critical mass. People are passing the word. Books are being written. DVD’s are being distributed. Outside of the mainstream media, the Internet is having a powerful impact. The overall flow of information is pretty strong right now. It is going to take about two generations, in my opinion, but in the long run I see total victory for free markets and for personal freedom. I feel really good about that.

Daily Bell: From our point of view, the Middle Eastern wars are intended to spread Western-style collectivist democracy to the Islamic world. Has the West stumbled in its war against the Muslim religion (failure in Afghanistan, Iraq, Pakistan, etc.)?

Griffin: Have they stumbled? In my view, the conflict between the Western world and Islam is largely manufactured. There is no question that there are extreme groups within Islam, but my own research leads me to the conclusion that those are the very groups that have been fronted, aided and abetted by forces within America because they wanted to create an enemy – a dreaded foe to justify all the other schemes.

Daily Bell: The BBC, in a program last year came to a similar conclusion.

Griffin: Without an enemy, they cannot fight a war. Without a war, they cannot justify being in the Middle East. If they are not in the Middle East, they can’t control the oil and on and on you go.

Daily Bell: So … it’s at least partially manufactured?

Griffin: The war against Islam is manufactured and is actually a war that need not be. Did they fumble the war? No they created it! They created it and it is just a meme. They don’t want to win the war! They want to fight the war for ten years, twenty years, thirty years. They are not fumbling it. It is exactly what they want. It is not a question of winning or losing, it’s a question of just having it, prolonging it and using it as a means of scaring the daylights out of the American people and conditioning them to accept the loss of their freedom at home.

Daily Bell: Homeland Security is a dangerous institution in our opinion and one of the prime outcomes of 9/11. Do you see it being rolled back?

Griffin: I do not see it being rolled back under the present regime. It is not there because the American people wanted it, it is there because rulers wanted it and we still have the same rulers. I don’t see any reason why they would roll it back. They might try to tidy it up a little bit, so far as public relations are concerned. But I would be very surprised if they cut its budget, cut its staff, cut its powers or anything like that. I think it is going to continue to expand, all aspects of it.

Daily Bell: We had a polite but public argument with the savvy Ellen Brown. Can you give us a further response to Ellen Brown’s (Brownian) perspective on nationalizing banks since they, rather than the Federal Reserve, are responsible in her view for banking abuses?

Griffin: Well I am not aware of that debate, but I am certainly able to address the issue of nationalizing banks. There is no reason in my mind for the banking system, or for that matter, the automobile industry, the motion picture industry, housing or any other part of American life to be run by the government. I don’t see any reason for the hospitals or medical clinics to be run by the government either.

Daily Bell: Good point.

Griffin: The idea that whenever there is a problem the solution is for the government to go in and take control is one of the most absurd and childish concepts I have ever heard of. The idea that the government can do anything better than the free market is just based on complete absence of understanding how the free market works. The only thing I think the government can do better than anybody else is to fight a war. The only thing a government can do better is to kill and destroy, and that is what it is good at. If war is used to kill and destroy in defense of a nation, in defense but not as an aggressive act, and it is used to defend the lives, liberty and property of its citizens then war performs a proper function, in my view.

Daily Bell: So you see a need for some kind of limited government, practically speaking.

Griffin: It is tragic that we have to defend ourselves. But history shows if you cannot defend yourself then you become a slave to someone who moves in and takes over. So we need to have the killing machine, but that’s about all.

Daily Bell: But not the banking system?

Griffin: The idea that government should be running the banks is absurd. The American government has been in the banking business since 1913 when the Fed was founded. The solution is not to get more into the banking business but to get the government out of it completely. So I would say no, let’s get the government out of the banks completely and then make the banks follow the rules and regulations that any other business must follow. Give them no favoritism, no subsidy, no bailouts. Make them honor their contracts and if they fail then they fail. Let new banks come into existence.

Daily Bell: How long has gold and silver been used as money? We think silver anyway is a substance that has been used in commerce for up to 10,000 years of human history, not 2,000 as certain monetary authorities suggest.

Griffin: I would have to get my notes out on exact dates but it doesn’t really make any difference if it’s been 2,000 years or 10,000 years. The real issue is not how long but how well it has performed in that function. When you look at the historical record, there is nothing that has done as well as gold or silver as a medium of exchange because it has all of the essential qualities required of money. It is not perishable, it’s divisible, it has great value and it can be precisely measured. People have used just about everything for a medium of exchange but nothing has worked as well as gold and silver for thousands of years. The record is clear on it. That is what history has chosen over and over again. Why do we have to go looking around for something else? I don’t understand that.

Daily Bell: Do you have any other comments to make regarding where we are at this point in the 2000s rather unique history?

Griffin: The only comment I would like to make is that it is an exciting time in which to live. I am glad I am living at this time. I am glad because, for me or anybody else who is a free-market thinking person and one who cares about the future, it gives us an opportunity to make a difference in the world. I think it is a wonderful time to be alive.

Daily Bell: Thank you, Ed. You continue to make a huge difference. It is always a pleasure and an honor to speak to a free-market legend in his own lifetime!
After Thoughts with Scott Smith

What can we say about this remarkable man and the remarkable and honest answers he has provided us? Ed Griffin has fought for freedom throughout his life and his famous book on the Federal Reserve has in one way or another inspired millions to question their assumptions about money and the reality of their lives in modern society.

Ed Griffin is an achiever for freedom and he has continuously made an effort to advance its cause. We don’t have any explanation for what makes Ed Griffin go. He obviously does what he does because he has to do it. We’re just glad he’s around.

If we had any quibble with this interview (how can we, really?) it would be in the area of pessimism – even short-term pessimism. We know Ed was just explaining his viewpoint as honestly as possible, but we think, generally, that pessimism probably expends negative energy that would be better spent doing positive things.

And Ed, despite his views about the elite and their controlling ways, has quite obviously never let pessimism slow him down. He went out and wrote a tremendous book (one of a number he has written) that literally changed people’s lives and perceptions of their culture.

Additionally, Ed is very active in the peaceful fight for freedom in America. He may be pessimistic, short term, but he is the most active pessimist we know. Every day he gets up and does his part, his share, to fight collectivism and to try to gain back some ground for the American Constitution.

For us, Ed is a great inspiration – as a leader, as a fighter in a peaceful revolution of ideas and as a person who has created a life based on an inspiring and important belief structure that he obviously built up on his own. Ed, by the way, lived much of his life in a pre-Internet era. Much of his adult work was conducted pre-Internet, which makes it all the more noteworthy.

For us, of course, as we have often reported, the Internet is something of a game-changer. We look at what the Internet has allowed people to accomplish in terms of supporting freedom, and we begin to believe that the changes that have been made by the Internet are “already in the pipeline.”

Yes people’s minds have already been changed. Now, Ed Griffin believes it may take another two generations to show overwhelming results. But maybe not. There is, as Ed himself agrees, a foundational freedom movement in America, and we see one growing in Britain as well. There are setbacks in all things, and cyclical turnings as well. But people like Ed Griffin and Ron Paul inform us through their actions and intent that there are always two sides at work – and at least two stories being told simultaneously. And maybe, ironically, Ed’s own efforts may contribute to speeding things up. Freedom, real freedom, may not take two generations to achieve.

We want to end by observing that Ed Griffin-a man who certainly ought to know – sees many positives in the world today and in the Internet as well. What we’ll take away from this interview is the energy it exudes, and the excitement that Ed obviously has about the future of freedom, even as he acknowledges, realistically, the challenges ahead.

Thanks again, Mr. Griffin, for all you’ve done and have yet to do.

Interviews and after-thoughts may include the contributions of several Daily Bell editors and writers.

Indian Point Village, MO- RS Express Enterprises, INC.™ leadership executives stated today that they will make a major announcement on December 1, 2009 in regards to the future of the production company. Communications have been evident in the recent weeks through social media sights that the company is pursing projects in radio and television. The New Rob & Don Show!® is a radio program targeted to be nationally syndicated within the next several months. Program executives plan to use humor of the on air talent to display funny life experiences with the duo having a substantial age gap to get thousands to work every morning. In addition, Rob & MiMi on tour! On the bus!® will take a look at the music business in a edgy, innovative programming that will bring television to a new levels. Elaine Bultemeyer a spokesperson for the company stated today, “The announcement on December 1, 2009 really has nothing to do with the two new projects the company has taken on. However, the company is announcing incredible plans for the organization to gear up for future projects.” Bultemeyer commented, the announcement would come via press release, social media sights, email and Internet. For more information about the company contact Elaine Bultemeyer.

RS Express Enterprises, Inc.™ is an entertainment production company. We produced the Inaugural Ball for President Bush and Vice President Chaney. Produced military shows, award shows, mega parades, music festivals, music videos, photo shoots, television and benefit concerts around the world.

December 1, 2005 my career was on top of the world. I was working with some of the biggest celebrities, in the country music industry, and had just finished the first national homecoming for Vietnam veterans that gained world exposure and turned out to be a history channel documentary. My mother’s health was still good enough to travel and a few months earlier my parents were my guest at Operation Homecoming USA and rubbing elbows with all of the Joint Chief of Staff to the President of the United States. In January 2005, I had directed and produced the Inaugural Ball for the President and First Lady.

I was just finishing a grueling tour- Nashville, Branson, Chicago, Davenport, Branson, Nashville, and on to Loveland to surprise my mom and dad for Thanksgiving all over a nine day stretch. God was already preparing me for the guest I hated for many years prior to December 2005. I look back on the tour and God let me see all the people that meant a lot to me and were close to my heart. My busy family, that never has much time for me when I travel, had all the time in the world. I remember thinking as I headed back to Branson after a great holiday how fortunate we were to spend time together.  Everything was great as I parted back home knowing I needed rest before my military USO tour that would start five days before Christmas.

Amarillo, TX 2:00am it was evident to me that the uninvited guest had arrived not knowing hours from that moment my life would change forever.  My temperature was 104 degrees and my focus was on home because I knew that something was crippling me on the inside. All by myself I traveled across Oklahoma praying to God that he would let me make it home, as God spoke to me through the radio- through song. I passed out in a rest stop bathroom. When I came to a man would not help me telling his son I had too much to drink. They thought I was drunk.

The only way I was able to make it to the hospital from that trip was through my faith in God. I knew I was extremely sick.  I really was in so much pain my doctor was amazed I lived through the journey home. Prayer, scripture, and God’s voice got me home nothing else.  All the teaching from my past kept running through my head along with memories from my childhood.  If you really believe in God and really need his help he will see you through was clear to me that day. Even when you know there is a storm ahead, he will carry you to the storm and will help you to face your Uninvited Guest. When God is preparing you for a storm in your life who do you call out to? Who do you trust? Do you pull over to the side of the road and die or do you keep your eye focused on the solution and keep driving? Do you let the others who ignore your cry for help convince you to give up? The attitude that you choose and your faith will see you through!

IOUSA (I Owe You USA / Le Debo a USA), es un documental que trata sobre la revisión de la situación financiera estadounidense que, desde la fundación del país en 1776, ha acumulado una deuda que en la actualidad supera los 12 trillones de dólares (US$ 12.000.000.000.000).

Desde su fundación, en 1776, la deuda nacional de Estados Unidos no ha dejado de crecer. Con la Administración Reagan la situación se agudizó y, por primera vez en la historia estadounidense, la deuda nacional alcanzó cotas alarmantes en tiempos de paz. Cuando en 1988, Bush padre proclamó «no new taxes», la situación tampoco mejoró. Los intentos de Estados Unidos por controlar la deuda han sido en vano, y esta sigue siendo superior a los 12 trillones de dólares. Este documental permite comprender mejor los problemas estructurales de la actual crisis financiera e incluye entrevistas a Alan Greenspan, Ron Paul, Paul H. O’Neill, Robert Rubin y Paul Volcker.

Con un frìo pero certero mensaje, IOUSA intenta poner a juicio del ciudadano comun, el impresionante endeudamiento de la megapotencia.

Actualmente EEUU está acumulando deuda a un ritmo exponencial, a razón de US$ 50.700 por segundo y continúa acelerando.

Lamentablemente IOUSA se estrenó en Agosto de 2008 y no incluye las crisis financieras que vinieron luego, como tampoco contabiliza los déficits generados por el dinero de los salvatajes.

Muchas gracias paparazzi2013 por subirlo a vimeo, hacía tiempo que estaba buscando este documental con subtítulos.

Andrea Mitchell displays unbiased journalism

Maybe Andrea just wanted to invite Gov. Palin for a Coffee Summit!!

http://www.weaselzippers.net/blog/2009/11/pics-of-the-day-andrea-mitchell-tries-to-ambush-palin-at-book-signing-stopped-by-the-police.html

In september werd het de men’s underwear index gelanceerd. De theorie stelt dat de verkoopcijfers van mannenondergoed een barometer zijn voor de economie. Gaat het slecht, zit de verkoop in een dipje, gaat het beter, rennen massaal naar de winkel voor nieuwe slips (enfin, da’s wat overdreven, ik weet het).

Het verhaal gaat dat de theorie gelanceerd werd door de nu 82-jarige Alan Greenspan, decennialang grote baas van de Federal Reserve Bank, de Amerikaanse centrale bank.

Maar… klopt de theorie wel? Er twee gaten in het verhaal.

Ten eerste was de theorie bijna een boutade van Greenspan tegen journalist Robert Krulwich. Beiden bespraken de correlatie tussen tighty-whities meer dan dertig jaar geleden. In 1977. De mannenondergoedwereld was toen toch heel anders. Dat is pre-Calvin Klein-tijdperk. Toen kochten moeders en echtgenotes de broekjes.

Greenspan’s Underpants

But the metric might not be as revealing as it’s purported to be. Greenspan’s reported theory—that men only buy new underwear when they are feeling flush, since it’s the one garment no man really cares about given that nobody sees it much—actually dates back to the seventies, when he shared it informally with a young NPR reporter, Robert Krulwich. It wasn’t until Krulwich brought it up again on-air in late 2007 that it took off.

“I am really amazed by this,” says Krulwich. “All of a sudden, all these people are writing about this, and I’m getting calls. This would definitely qualify as giddy.” Irrational exuberance, even.

But what no one bothered to find out, Krulwich said, was that Greenspan actually told him this idea more than 30 years ago. This was back when the U.S. was emerging from the gas crisis, when women still bought most underwear for men, and before Calvin Klein would inaugurate the full-scale erotic commercialization of this once-private garment. Today, courtesy of low-cut jeans, underwear is often one of the most visible parts of men’s attire, all of which has helped men’s skivvies snowball into a category that grossed more than $2.4 billion last year.

Zou de theorie desondanks nog gelden? Mannenondergoed als illustratie van consumentenvertrouwen? Amerikaanse mannen kochten in de eerste helft van 2009 4,8% meer ondergoed.

Maar hier is de “ten tweede”. Ondergoedverkoop steeg, maar dat is alleen te danken aan een spectaculaire stijging in de verkoop van 18% meer onderhemdjes. De slip- en boxerverkoop daalde zelfs, met 1,5%.

Again, not so fast. None of the reports of this underwear bellwether bothered to break down the figures. The sole reason that sales of “underwear” are up this year is that sales of undershirts are up 18 percent. Bottoms—as briefs, boxers, boxer-briefs, et al. are known—are down 1.5 percent, and both numbers figure into the tally. According to Bloomingdale’s menswear V.P., Kevin Harter, the store has seen a dramatic increase in sales of undershirts, especially plain V-necks, a trend he ascribed to guys’ wanting something simpler after pricey statement T-shirts. NPD’s chief industry analyst, Marshal Cohen, notes, “Just like underwear has become an accessory, the undershirt has become an apparel item.” Or perhaps men are wearing undershirts again to get more wear out of their work shirts, too. After all, one of Greenspan’s other barometers, Krulwich says, was dry-cleaning sales.

IN A DISCUSSION I HAD EARLIER this week with Dr. Jim Willie, we discussed how the prices of gold and silver have been arbitrarily managed for years. In this discussion, I contended that, while the prices of gold and silver have been closely managed, the growing “off-take” of physical bullion is inflicting great damage on price managers. We can see manifestations of this reality in that price corrections [sell-offs] are much shallower and shorter lived than they were even last year.  Jim asked me if I could provide any “hard data” or minutia showing the amounts of physical metal being taken off the market in recent weeks.

Unfortunately, I cannot. The reason for this was best encapsulated in comments by GATA Secretary / Treasurer Chris Powell back in April, 2008 in Washington, D.C. when he opined:

“Indeed, the disposition of Western central bank gold reserves is a secret more closely guarded than the blueprints for the manufacture of nuclear weapons.”

With the micro details being withheld or obscured, the proof to the thesis that price managers are hemorrhaging physical bullion is more “macro” in nature. So here’s a review of the macro picture (or “known-knowns” in Rumsfeld-ian double-speak), starting with a daily chart of gold for Sept. 8, 2009:

And now here’s a chart of silver over the exact same time period:

Now, I’d like everyone to see the two charts overlaid:

The charts from Sept. 8 were not cherry picked – they typify the intra-day “rigged” relationship of gold and silver over the past number of years.  The real evidence that a shortage of physical metal exists and is ongoing is as follows:

1] The prices of gold and silver have tripled over the past 6 years.  This in it self, given that we know prices are arbitrarily “set” – is evidence of rear-guard activity.
2] The U.S. mint has suspended production of Silver and Gold American Eagles on numerous occasions
3] Over the past couple of years, premiums being paid for small bars and coins [due to lack of availability] have been as much as 10 – 60 % over the ‘posted’ futures prices.
4] European Central Banks have been unable or unwilling to fulfill their quotas [roughly 130 – 150 metric tonnes sold in the last year of the recently expired Washington Agreement allowing for 500 metric tonnes of sales per year].  The ineffectiveness of the Washington Agreement to suppress the gold price – as it once did – is a very likely reason why the specter of I.M.F. gold sales has recently been rekindled.
5] Central Banks like China and Russia are now publicly acknowledged buyers of gold bullion for reserve diversification – even two years ago they WERE NOT.  Call this the China / Russia “put” under the price of gold. (ie:  THESE ARE HUGE NEW PLAYERS ON THE BUY SIDE FOR PHYSICAL.)
6] As the Russians sent representation to GATA’s Gold Rush 21 conference in Dawson City back in 2005, Chinese sovereign wealth funds have met with GATA on at least 3 occasions (lengthy conference calls) since the spring of 2008 to get the scoop on how the gold price has been suppressed – giving more credence to the notion that the Chinese are learning how the market rigging game is played, largely with fraudulent futures / derivatives.
7] Flowing from [6], the Chinese have publicly stated that their State run enterprises may unilaterally walk away from losing derivatives bets with un-named banks.
8] Fed Governor Kevin Warsh – responding to a GATA FOIA request – recently acknowledged that the Fed is indeed involved in gold swaps, reversing 2001 denials that they were involved in the same. This revelation flies in the face of sworn testimony provided by [then] Fed Chairman Alan Greenspan [a perjurer?] to Rep. Ron Paul back on Feb. 24, 1999:

“Last summer on a couple of occasions here when you were talking before the committees on securities and on derivatives you mentioned something that was interesting. You said that central banks stand ready to sell gold in increasing quantities should the price rise, which I thought was rather interesting.

Then I followed up with a letter to you to ask you whether or not our central bank might not be involved in something like that, in the gold market. And you did answer me and stated that since the 1930’s the Federal Reserve has had no authority to be involved with the gold markets.”

To which Pinocchio, err….Greenspan responded,

“…The issue of buying and selling gold as the price changes is indeed exactly what we used to do. We used to, at a certain thing called the gold points, which was the price of gold plus the transportation cost differentials, we, that is, the United States Treasury, stood ready to buy and sell gold at a spread, as indeed all other participants in the gold standard did. So in that regard that was exactly what was happening.

But, needless to say, since we have gone off the gold standard, and especially since 1973, there has been basically a general float of the dollar vis-à-vis gold, which means that the gold price is like another commodity’s price.”

Isn’t this LYING TO CONGRESS?

Gold Swaps have long been proven by GATA to be a primary means by which Central Banks nefariously mobilize sovereign gold stocks – creating stealth supply to sell into the physical market to suppress the gold price.

A note on the gold and silver derivatives game from my good friend Rhody:

“Futures contracts were introduced in gold and silver for the first time in 1974 in Winnipeg, Canada as a trial system.   It worked so well, it was shipped to New York the next year and that began the paper gold, multiple selling of each ounce system…

The BIS [Bank for International Settlements] issued data on the status of silver derivatives held by member banks this year.   It was 111 billion dollars. The world produces  $10 billion in new silver each year, of which ALL but $1 billion is consumed by industry. That means that these $111 billion represent debt instruments backed by only $1 billion of investor held silver.   That’s a 100 to 1 ratio. Keep in mind that the $111 billion does not count the derivatives held outside the banking sector.

There could easily be an additional $100 billion of derivative silver debt held by hedge funds, mines, jewelers and investors.   This is why I say that each ounce of real silver is sold over 100 times, and by that, I mean it could be 200 times. And the guys who sold the derivatives are not the same guys who hold the $1 billion in real silver.

You must understand that the Western centric financial system in all its parts is a complete fraud.”

These things – taken together – should reinforce to ANYONE who’s paying attention, that while the prices of gold and silver are STILL arbitrarily set by price managers, THE GAME HAS CHANGED. Access to (or a lack of) physical metal is the Achilles Heel of the price rigging game and only real question is how quickly the price managers retreat and whether the melt-up remains orderly?

Got physical precious metal yet?

Max Keiser, in the premier of his new show on Russia Today, comments on the U.S. funding the Taliban, President Barack Obama’s Asian tour proving U.S. economic desperation, global ‘de-dollarization’ and (of course) Wall Street crooks with Danny Schechter (27:03):

RELATED:

• When Only Abolition is Just, Reform is Naïve
• Gold Hits Record High as India Dumps Dollars

What got us into this mess?

First, an admission.  I, like all of you, have too many books on my “I should read this” list that I simply will never get to.  In my case, I prepare a minimum of two new book synopsis presentations a month, and that means that there are other books that I simply do not have time to delve into.  At this moment, the books that I am not getting to are books that try to answer these two questions, both related to our current economic meltdown and ongoing crisis:

Question number 1:  What went wrong?
Question number 2:  How do we fix it?

There are a lot, a mean a whole lot, of answers to the first question being thrown out for our consideration.  (Not quite as many for the second question).

Business Week has a review up of one of the many new books tackling these questions.  (One of the many I do not know when I will find time to read).  The book is How Markets Fail:
  The Logic of Economic Calamities by John Cassidy
.  (Read the review here).

Here’s a quote from the book (taken from the review):
Between the collapse of communism and the outbreak of the subprime crisis, an understandable and justified respect for market forces mutated into a rigid and unquestioning devotion to a particular, and blatantly unrealistic, adaptation of Adam Smith’s invisible hand.” And it was this faith, he goes on to say, that led Alan Greenspan, among others, to turn a blind eye to what was happening in the real world of money and business.

This book calls for greater government regulation as one part of a solution.  Chris Farrell ends his review with this:
More important, the reader comes away persuaded that reality-based economics can play a critical role in what the 18th century British conservative Edmund Burke called “one of the finest problems in legislation, namely, to determine what the state ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion.”
Let’s hope the legislators in Washington share this principled view of their role. Cassidy makes a compelling case that a return to hands-off economics would be a disaster.

As I stated earlier in this post, there is much being written about what went wrong.  A provocative piece in The Atlantic points to an unexpected but specific contributing cause:  the role of pastors in fundamentalist/prosperity gospel churches on the sub-prime mortgage crisis.  The article, Did Christianity Cause the Crash? by Hanna Rosin, argues this:
America’s mainstream religious denominations used to teach the faithful that they would be rewarded in the afterlife. But over the past generation, a different strain of Christian faith has proliferated—one that promises to make believers rich in the here and now. Known as the prosperity gospel, and claiming tens of millions of adherents, it fosters risk-taking and intense material optimism. It pumped air into the housing bubble. And one year into the worst downturn since the Depression, it’s still going strong.

The article chronicles how some banks partnered with some churches, especially some pastors, to help people get into houses.  Houses they could not afford, and ultimately could not keep.  Here’s the conclusion of the article, referencing Pastor Fernando Garay from Virginia:
And there is Garay’s kind of hope, which perhaps for many people better reflects the reality of their lives. Garay’s is a faith that, for all its seeming confidence, hints at desperation, at circumstances gone so far wrong that they can only be made right by a sudden, unexpected jackpot.
Once, I asked Garay how you would know for certain if God had told you to buy a house, and he answered like a roulette dealer. “Ten Christians will say that God told them to buy a house. In nine of the cases, it will go bad. The 10th one is the real Christian.” And the other nine? “For them, there’s always another house.”

I don’t know that there is one cause.  As Scott Peck stated, it is “overdetermined.”  The cause of most problems is overdetermined – that is, there is no one cause, there is a constellation of causes.  And, thus, there is no one solution.

But finding the causes, so that we can avoid them in the future, and then finding the solutions, so that we can dig out of this mess, seems to be the necessary agenda at this time in our history.

That’s right. Don’t believe me? Check this out. Then, by all means, do more research to see if it’s accurate. I was alerted to this by a documentary I just watched called I.O.U.S.A. It features Warren Buffet, Alan Greenspan, Robert Bixby, Ron Paul, David Walker and several presidents and other politicians. I would really love to see an updated version, now that our national debt has taken off even more than I believe they anticipated. You can watch the video on Netflix or in parts on youtube. Also there is a micro-version on youtube, which is probably good.

In short the film talks about how big our national debt is, how it got that way, how it’s going to get worse if we do nothing and finally how to do something about it. I got a pro Ron Paul vibe from the documentary, but it gave me such a pro Ron Paul vibe that I didn’t mind it at all.

So seriously. Check it out.

“Integrity is not a 90 percent thing, not a 95 percent thing; either you have it or you don’t.” – Peter Scotese

Sort of like you are either pregnant or your not.

Integrity is the foundation of character. Character is the light of one’s personality.

Integrity has has been washed away and diluted in a sea of apathy and pragmatism.  It no longer matters how one got to where he/she is at just that they got there.  The ends justify the means even if the ends has no real value.   Society today bases integrity from a subjective, Survivor-type mentality.  People will do eveything they can to build a facade of integrity.  However, when circumstances of life come calling to test one’s true character many readily embrace a pragmatic mind-set that contradicts their facade.  A mind-set that will do anything to get ahead or to keep one from experiencing challenging consequences of a decsion based on integrity.

“We all make mistakes.”, “I am not perfect”, or Christian sin to.” – These are all true statements, but they are not statement to be used for sentimental purposes of easing one’s conscience about mistakes, inperfections, or sins.  These cliche’s are used to justify a lowered standard.  Another conscience easing trick is to tell one self and other -” I want to go in such and such a direction”, but continue heading in a different direction.  More important is the direction one is heading.  Mistakes and sins only have redeeming worth if one is heading in the right direction.  Mistakes will be made and sins committed.  the battle lies in which direction one is heading.  When one is heading South when he/she should be heading North and continues on such a course after being advised the direction is wrong will only end in failure in the end.

The deceiving aspect of direction is the wrong direction can feel like the right direction. Heading in  the wrong direction can be  easier than heading in the right direction.    Many times success seems evident while heading in wrong direction.   When one becomes secure and content to head in the wrong direction it is hard to turn them back, especially when the right direction probably will be more challenging with great obstacles and less comfort.  Ultimately, the journey is not about what we are to the world or about what stuff we accumulate, but about who we become in the process and how we impact others in what they become.

With the loss of integrity comes the loss of true excellence because without integrity pragmagtism takes over and the primary goal is to feel good about oneself and just get along without a true sense of standard.  It is human to think and then portray ourselves as something more than we truly are.  It is  men and women of integrity who step outside themselves to see who they truly are in order to realize what excellence is and how to successfully get there.

These men and women know it is not about them – their careers, their comfort, or their reputation.  They believe it is about doing what is right no matter the cost.  They live it and just don’t talk it.  None of their time is spent waxing and buffing how they want people to perceive them.  If any of their time is wasted it is in finding apathetic and cowardly standards.

The following link below is to PBS Frontline -The Warning

It is about a women of integrity – Brooksley Born  She stood up against the establishment of Alan Greenspan and his cronies and lost her job.  What she predicted has come true.  Alan Greenspan in the end admits his economic theory of 30 plus years was flaud.  This is a man who everyone worshipped.  American leaders blindly followed his leadership.  His decisions and thinking has led American down a destructive path.  Greenspan’s theories were wrong because he lacked integrity. 

Brooksley Born had integrity and courage .  She stood her ground not for her benefit but for the benefit of the American people.  She is a true patriot, a true person to follow after. 

http://www.pbs.org/wgbh/pages/frontline/warning/?utm_campaign=homepage&utm_medium=bigimage&utm_source=bigimage

Either you haven’t heard that in a while, or you missed the boat the first time around, E-Reserves is here to bring you some gems from the E-Reserve. Our first feature are the Avalanches, who you might remember were included in one of our playlists from over the summer. They’re a group from down under that compiled vinyl samples into a clever electronic album back in 2000 titled Since I Left You.  A lot of the sounds used have a warm nostalgia that infuse The Avalanches’ perfectly crafted, danceable beats. Yeah Develop baby.

since i left you – the avalanches

a different feeling – the avalanches

two hearts in 3/4 time – the avalanches

tonight may have to last me all my life – the avalanches

“But the ones who suffer aren’t the ones who benefited”

That’s George Soros to the Chairman of  the Federal Reserve Alan Greenspan who had dismissed the impact of economic downturns (quoted in David Hare’s play ‘The Power of Yes’).

There’s no better metaphor for that, and the whole of the credit boom, than…the experience of David & Margaret Chandler from Ipswich.

They saw an advert in 2007 by a company called Blackwood who would arrange for them to sell their home, realising the equity, but allowing them to stay in the house as tenants. That was an attractive proposition for them as it meant they could remain in the bungalow they had spent £20,000 adapting for David who has to use a wheelchair.

They received £110,000 but a month later Blackwood still hadn’t told them who to pay the rent to. They were eventually told to pay Mr Mahmood. Then a couple of months later they were told to pay Mr Nadra instead. Not long after that the rent was returned. When they queried it they were told that their landlord had closed that account and could they pay into his business account instead. They did. Not long after that they opened a letter from a mortgage company addressed to their landlord which gave them 6 weeks to leave because the mortgage hadn’t been paid.

The money

Purchaser

Blackwood had acted as an agent for Mr Mahmood who had paid £110,000.

Second purchaser

Two months later Mr Mahmood sold it to Mr Nadra for £185,000. But he told the mortgage company he was living there; they had no idea it was actually the Chandlers who lived there.

It wasn’t just the house that was changing hands. The mortgage was too.

Mortgages

The £185,000 mortgage (no deposit) was taken out with Gmac. Two months later it was sold to the Bradford and Bingley as part of a package of more than a billion pounds worth of mortgages. Not long after that, the Bradford and Bingley had to be nationalised by the British government. The mortgage is held in the ‘Mortgage Express’ division which specialised in Buy to Let mortgages. I use the past tense because the division has been shut to new customers and has been desperately trying to get its customers to move their mortgages elsewhere.

So who has benefited and who has lost out in this credit boom morality tale?

Mr Mahmood    

Mr Mahmood certainly benefited; he bought a house at significantly less than market value, paying £110,000. The likelihood is that he bought it with a buy to let mortgage which meant he didn’t have to put any money up himself. He then sold it on a couple of months later for £185,000

Mr Nadra    

The BBC reports that Mr Nadra got a 100% mortgage on a property that he claimed to be living in which suggests he wasn’t paying the relevant market rate for a mortgage. He took the rent, but didn’t pay the mortgage. Meanwhile he’s jeopardised the Chandler’s home. Sounds like a benefit doesn’t it?

Blackwood Properties    

Blackwood took advantage of an unregulated area to marry sellers and purchasers, taking their fees as the middleman. Some regulation was introduced in this area in July 2009, more regulation is planned for 2010. Blackwood is no longer trading.

Gmac    

GMAC began life as the finanace arm of General Motors. In 2006 51% of the company was sold and the company was hived off from GM. GMAC has received $13.5 billion in bailout money from the US government. It stopped issuing mortgages in May 2008. In October 2009 it was fined £2.8 million and ordered to repay £7.7 million in unfair charges it had levied on its customer. In November 2009 it was announced it was the only institution receiving bail-outs that had failed to meet US Treasury capital requirements.

Mortgage Express (Bradford & Bingley)    

Mortgage Express was the arm of Bradford and Bingley that specialised in Buy to Let and Self Cert mortgages; aka sub-prime, aka junk, aka toxic. Lenders could borrow 100% of the value of the property on the basis of their own assertions that they could repay. It stopped offering mortgages in September 2008 and in 2009 has been aggressively running down its loan book, encouraging customers to transfer their mortgages. In 2007 it was named the biggest-buy-to- let lender in terms of new lending and outstanding balances by the Council of Mortgage Lenders. As they put it in a press release…“this is a tremendous achievement”

The Chandlers    

They, of course, are Soros’s losers. Ordinary people trying to get on with their lives in an honest way. They sold their house for below market value to unregulated people and now they are being evicted.

Oh and of course…

The Taxpayer    

With Mortgage Express, the state has to bail out a company which boasted its achievements in cornering the sub-prime market:

We are left with ‘assets’ of overvalued property many of which may turn out to be virtually impossible to realise. More than 5% of customers are 3 months or more in arrears.

I say ‘we’ but of course all of this is being managed by the very people who got the country into this under-regulated mess in the first place. Both politically, and, administratively in the banks.

That’s the morality tale; I’ll explain why it’s such a good microcosm of the whole mess in future posts.

Macro

Debt-Addicted Consumer-Cultures Can Resist Everything… Except Temptation

Today, I’m going to go back to the nuts and bolts of fundamentally basic concepts in economics. Again, forgive my simplicity in the first few paragraphs, but as an economic layman, it’s worth continually reminding myself of the building blocks that make up the complicated financial World we have made for ourselves. Last comment I spoke of China’s role within the globalized economic machine so I’ll use today just to plant a few seeds.

Let’s start with something simple, if a well-to-do man called Mr A. Merica asked to borrow $90 for a year and said that they would give you $100 in a year. You might want to take that risk for $10 potential return or around 10% rate of yield - aka rate of interest. You now own a loan and will probably get a little certificate of receipt for it – just to prove ownership of the loan. Now, what if Mrs C. Hina, who really likes the risk-profile of Mr A. Merica, asked if they could buy that loan certificate off you. Well, you like the risk profile of the loan too, otherwise you would not have taken the loan in the first place, you also stand to make $10 on that purchase, so any sensible person would try to sell that loan for a profit or at a higher price. If you then agreed to sell that loan to Mrs C Hina for $94, you would make $4 profit. This means, however, that the loan that Mrs C Hina owns is only good for $6 return when the loan finally matures at $100 – that is to say, the yield or interest on the loan has decreased from around 10% to around 6%. This cements a simple mechanical relationship in finance:

Statement #1: as people buy loans, the price of loans go up and the yield rate or interest rate goes down. Similarly as people sell loans, the rate of yield or rate of interest goes up.

Now, I’m sure you’ve guessed, I’ve used the example of Mr A Merica to symbolize loans from the American government. But not all loans are of the same length. Some are for only a few months and others can stretch for many years. The yields for all the loans, however, can be collected together and plotted on a graph of yield (on the y-axis) and time or the length of time to maturity (on the x-axis).

Statement #2: the graph of yields of government loans with respect to the term of those respective loans is called a “yield curve”.

This is arguably the most important financial chart in economics. The US yield curve looks something like this:

Source: Bloomberg

Notice that the lengthier the loan, the higher the interest demanded of it – which makes sense intuitively as a longer loan is more risky to the creditor.

How does this impact us economically? OK let’s stay with the raw basics: firstly, the concept of borrowing from the public. As individuals, if we want to borrow a substantial amount of money we go to a bank. The bank manager looks at our financial “balance sheet” and then decides how much he will loan us and for how long. There is also a rate of yield that the bank will demand for the risk the bank is taking by lending you the money (what if you die or default or run off to hide in Peru?). Of course, just like with the loan example above, this rate of yield is called the interest rate on the loan. The riskier the creditor (i.e. bank) deems the loan to be, the higher the return they will demand, therefore the higher the interest cost the debtor (i.e. borrower) will incur.

Companies borrow from banks too, but often are not happy with the rates of interest that banks charge them and so they go to the public or to public investors to ask for the loan. Everybody has a different opinion about the risk/reward profile of any particular loan so these loans often change hands between investors – just like the sale of Mr A Merica’s loan to Mrs C hina. However, because this loan is “publicly issued” and is “publicly tradeable”, this loan is called a bond. Governments spend a lot of money too: when you finance a war in Iraq, bail out a bunch of banks or fund a massive national healthcare system (see the bill that just got passed, this weekend) this does not happen “for free” – there is risk involved. Not everything can always be funded from tax receipts, so governments frequently go into debt by borrowing from the public too. They issue government bonds – called “Gilts” in the UK, “Treasuries” in the US.

In the case of American and British government bonds, some of the most important “public” buyers are actually other countries who have cash handy to spend, in today’s environment, the two countries with the luxury of cash to spend on Trillions of dollars of other governments’ debts are: Japan and China. This is largely down to what we call a Trade Surplus: that is they export and sell so many products to places like America that all these dollars come flooding back into their respective economies via revenues from the manufacturing sector. Be they companies or individuals being paid by companies, this money represents the precious fruits of all the diligent, hard-working Chinese and Japanese savers and has to be invested somewhere, preferably somewhere safe. A sensible place could be the largest and deepest AAA-rated government bond market that is US government bond market (i.e. Treasuries). China and Japan are the largest purchasers of US Treasuries. It should be noted that there is another important group of buyers of government bonds who are not state-controlled but, rather, just a consortium of very large and highly influential public investors. These investors are much more nimble and aggressive than state-controlled purchasing programs and do not have the same geo-political diplomatic restraints on how they conduct their business. So fragile yet important is this relationship between borrowing governments and investees that, with acute knowledge of the government bond market and intelligent timing, these individual investment firms can actually control/influence government policy simply by timing how and when they purchase government bonds. This select group of dissident investors became know as the Bond Vigilantes.

Now, the simple mechanics of statements #1 and #2 tell us that: as you buy any loan asset, including bonds, the prices will go up and the yield will go down or that the “yield curve” of government bond interest rates will fall and/or flatten out. This keeps interest rates low across bonds of all length or, as we say, across the entire yield curve - which also affects us directly as individuals. Interest rates for everything (from mortgages, to car loans, financing deals, business loans, credit cards, interest rates on bank loans/overdrafts) are basically benchmarked off the government bond yield curve. As most of the public now has some form of debt or mortgage, countries like China and Japan have a degree of control over these borrowing, developed countries like the UK and the US. Not just economically, but also in a way which directly affects our lives and well-being – and so therefore politically too! Therein lies the importance of China and Japan in this great imbalance: by continued repurchasing of bonds in governments like the US and the UK, China, especially, has helped to fuel a virtuous cycle of debt.

As the new-comer on the economic global scene and new driver of global economic growth, China’s purchases of other governments’ debt (bonds) in the over-leveraged AngloAmerican consumer economies, has helped keep interest rates low. This has enabled more consumption to take place due to the Wealth Effect of lower mortgages and lower interest payments on loans and credit cards. More consumption by The West has enabled China to export yet more products to them thus acquiring more dollar reserves thus needing to invest those dollars back into Western government bond market, thus keeping interest rates low and so the virtuous cycle of debt continues…

Oscar Wilde once said, satirically: “I can resist everything but temptation”. China has been fueling our consumptions habits and our addiction to debt. Rather than weighing up the risks of this as individuals and politically, as nations, we practically bit their arm off. As Roach pointed to, China didn’t force the US and UK consumers to take on massive amounts of debt risk, plunging our economies deep into the abyss – we did this all by ourselves.

But there is a delicate game of poker being played at the highest level. By buying US dollar denominated government bonds, China is at risk from a depreciating dollar as the Western central banks pursue Extreme Monetary Policy which risks debasing their respective currencies in pursuit of their holy grail: inflation. If you remember on the 29th October I wrote:

It gets juicy when one considers the political ramifications of this. A stronger Dollar is typically reflective of a stronger economy: more jobs, higher growth, higher confidence etc. Yet more interesting is that the Treasury is critically dependent on others to have confidence in the Dollar in order to fund their ballooning deficits. By purchasing trillions of Dollars of US government bonds and other securities, China and Japan are literally keeping the lights on in the US economy. Thus there is a great mind game being played: while pursuing neglectful tactics on the value of the US Dollar, the Treasury, in its brazen hypocrisy, is desperately marketing the case for other states to invest in a so-called “strong and stable” Dollar. Nobody, it seems, dares to question the notion that there may be more “fabrication” than “fabric” to the Emperor’s New Clothes and that, rather embarrassingly, our great pontiff may just be prancing around in the nude. But, do not be deceived by this comical display; the American message here is subtle and yet extremely poignant:

You want access to our consumers? You gotta pay for it.  

“You” will pay for it in via a premium of uncertainty surrounding the security of our currency, The Dollar. This is a fascinating diplomatic tightrope walk, as it confronts the risk/reward payoff of mercantilism on both sides of the, globally imbalanced, fence. It questions both those who export goods to fund purchases of Dollar-denominated fiat paper and those who export Dollar-denominated fiat paper to fund consumption habits for imported foreign goods. So far this feeling-out process is working in the sense that, despite disorderly monetary expansion, there has been no disorderly collapse of the Dollar.

I leave you with this clip just out from Reuters just out this weekend. The plot thickens…

Macro Data to Watch

• Nothing much out today.

Markets

Precious metals like Gold and Platinum continue to hit new highs – this is just a manifestation of a diversification out of the Dollar in my opinion (rather than a veiled bet on hyperinflation or Armageddon). However, when you put all three attributes into consideration it’s easy to see why some investors, and indeed why some governments and central banks (namely in places like India, China and even Russia), are increasing their reserves.

Global Stocks to Watch:

• I think it’s time to start looking at companies which have revenues at risk in USDollars (i.e. Dollar Revenues with unhedged costs in Yen, Euro, SouthAfrican Rand, Aussie Dollar etc).
• Earnings:
  • Fubon
  • NTT
  • Allianz

I have been reading two truly hilarious novels lately. One of these, PG Wodehouse’s Thank You, Jeeves, deserves credit for being intentionally funny. The other, Ayn Rand’s Atlas Shrugged, not so much.

I bring this up because it’s been well reported that sales of Atlas Shrugged have jumped considerably in light of the recession. So much so that there’s a recent rash of books coming out discussing Rand’s books and the philosophy she professed. Last week’s Economist magazine had an article on her, and there have apparently been rumours in Hollywood that an adaptation is being fast-tracked. Her new popularity is being credited to the recession as the book prophesises an economy grinding to a halt, and a government scramble to fix it which instead makes the whole thing far worse. It is this view that leads me to believe the rest of the world has read a different Atlas Shrugged from the one I have, as the philosophy espoused in my version has been rendered provably wrong by the recession.

I want to point out that the recession is not the reason I read this novel. I picked it up because I recently played and fell in love with a videogame called Bioshock, which deliberately establishes itself as a counterpoint to Atlas Shrugged. If you find it audacious that a mere computer game should challenge such a celebrated book, I ask you to consider what a stunningly brilliant piece of fiction Bioshock actually is, and what a tawdry sci-fi Atlas Shrugged descends to. I don’t take any pleasure in attacking the book like this. There’s no denying that Rand was a writer of exceptional talent. Her prose simply flows from the page. The problem is that this book is far too self-indulgent and lost in its message to be enjoyed as fiction, and too shallow to be regarded as philosophy.

I don’t want to get bogged down with discussing the plot, except to say it tells the story of Dagny Taggart and her battle to run a railroad company in the face of government interference and her inept brother, president of the company. I found it useful to imagine Dagny as a young Margaret Thatcher, as it helped me to understand her motivation (thought it did also make the sex scenes pretty disturbing). The reason to read this book is to try to appreciate fully Rand’s philosophy of objectivism. Objectivism states that pursuing one’s own happiness in a moral imperative, and that the free market and laissez-faire capitalism are required to regulate society. Its opposite is altruism, and Rand certain isn’t shy about expressing her contempt for “the need of the many”.

I suppose her work is enjoying renewed popularity as the bail-out of banks and motor companies in the States, not to mention our very own Nama, smacks of the collectivism to which Rand was so opposed. The trouble is that our recession wasn’t caused by altruists or collectivism. Alan Greenspan, who can largely be credited as the architect of the recession (and who was himself a disciple of Rand) has admitted to the flaws in free market ideology exposed by the recession.

Of course supporters of objectivism are not without ammunition. In one scene in Atlas Shrugged Dagny is interviewing the manager of a failed bank. He tells her: “If people needed money, that was enough for me. Need was my standard… I did not sit on piles of money and demand collateral from poor people who needed money. Their heart was my collateral.” This should remind us of the 100% mortgages that fuelled unsustainable housing bubbles here and elsewhere. In the US this was largely begot by a government policy to ensure every American family were homeowners, a policy envisioned by the Clinton administration and encouraged with gusto by Bush. All of which is in line with Rand’s opposition to state-interference with business. But it doesn’t hold, not from my reading of the novel. At the end of the interview the manager tells Dagny: “You haven’t any right to despise me,” continuing, “My motives were pure. I wanted nothing for myself. Miss Taggart, I can proudly say that in all my life have never made a profit.” To this Dagny responds: “I think that I should let you know that of all the statements a man can make, that is the one I find most despicable.” There are many, many reason to despise our real-life, modern day bankers, but the charge that they were uninterested in profit is not among them.

Even without the perspective of the recession, there’s something clearly wrong with the way Rand presents her philosophy. All of her characters motivated by profits are depicted as brilliant visionaries incapable of making a mistake. Whereas anyone who ever express concern for the common good is immediately caricatured through varying combinations of stupid, myopic, scheming, power-hungry, weak-willed, cowardly, unfocused and physically unattractive. Rand is dealing in black and white, tabloidy absolutes. In addition, in the second part of the novel we are told that the “looters” are planning the mysterious “Project X”, which they demand be kept secret at all costs. But I ask you, how secret can this project be if those involved frequently boast about it, as if it offers some kind of threat or social currency? This is the kind of presentation one expects of cheap thrillers. In a philosophical novel it smacks of lazy, straw man propaganda, the same category of propaganda Rand damns in the book.

As much as all this bothered me, however, none of it came close to my biggest complaint with the book: its smugness. I never before encountered a novel I’d describe as smug. I never even entertained the notion that a novel could be smug. Yet this is a book that takes an extraordinary level of comfort in the absolute believe in its own hypothesis. For instance, there’s one scene during a wedding reception when one of the heroes overhears someone remark: “Money is to root of all evil,” and immediately launches into a speech on why money is the root of all good. This speech goes on for five pages – FIVE FECKIN’ PAGES of ranting that money is great – and when he finally finishes he smarmily states: “If you can refute a single sentence I shall hear it gratefully.” Of course nobody can refute it. In Rand’s world those who don’t love money are the enemy of reason. However, in reality there is very little to refute. Despite the length of the rant, it contains precious little that can be called evidence or arguments. It’s just a series of idealisations and insults. Nowhere, however, is the novel so smug – or for that matter sleazy – as when a train pulled by a coal-burning engine is force to through a tunnel, smothering to death all its passengers. During the events that lead up to this Rand take every opportunity possible to state this would never have happened under a free-market, capitalist model (i.e., General Motors would never knowingly allow cars with a dangerous fuel-tank design on the market, because they reasoned that the costs they’d incur being sued by anyone hurt would be cheaper than a recall). What really makes this scene perverse is that as the train enters the tunnel Rand take the time to make a list of those killed and point out – in a language more damming and incensed than anywhere else in the book – how they all contributed to the altruistic society that ended them. She kills off a train full of people just for the opportunity to mock and whisper, “I told you so,” with thigh-rubbing glee. It should be a tragic scene but ends up just sickening, and not for the reason Rand intended.

I don’t know why I’m posting this, except to get it off my chest. I don’t expect anyone who has an opinion on Rand either way to be challenged by what I write here. I guess I’m asking why anyone still believes Rand’s theories make sense. What is it that I’m missing? One of the repeated messages in the book is that when confronted with two scenarios that seem to contradict each other, by checking your premise you will find one scenario to be false. Well, here we have renewed interest in a brand of economic theory, at a time when implementation of that theory has proven disastrous. If Rand is right, one of these is false. I’m going to email a link to this post to all the Randian theorists I can find, because I genuinely want the answer to this.

I want to close by highlighting another example that disproves Rand’s philosophy. Now, I read somewhere (though I don’t remember where) that she herself was once asked about the plight of native Americans and how this contradicts her belief, to which she simply dismissed the question as leftist propaganda. I don’t know if this is true, but there is another issue we can look at: blood donation. Here in Europe we take a very altruistic approach to blood donation; we do it because socially responsible. Our only reward is a few biscuits and the knowledge you may have saved someone’s live. In America they tried a different approach; paying people to give blood. As a result is was a service taken up by homeless people and drug addicts, or those similarly desperate for money. The blood products derived from these people were sold on to other health services across the world, including ours. This is why so many people were infected with HIV and hepatitis through receiving blood products. Many more people died from this scandal than were smothered on Rand’s train.

If sound like I’m damning the book, that’s not my intent. What I’m trying to say is that, personally, I would place Atlas Shrugged in the same category as The Communist Manifesto or even Mein Kamph; that is to say, important works that should never be forgotten or ignored, yet read only with an understanding of how deluded the author was.

Macro

Bernanke and the Butterfly – Revisited

Right, slowly but surely I’m getting this off my chest. So, we’re vaguely aware of what inflation is, what the Monetary Base of the banking system is and how this feeds the Money Supply of an economic system. We understand that the central bankers are running extreme monetary policy which is in part a reaction to the risk of a Balance Sheet Recession, which has surfaced due to an explosion of debt among both consumers and (now more than ever) the governments themselves.

We’ve also touched on how, over time, “establishment” has endorsed dubious techniques to derive inflation levels – like substitution methods, hedonic adjustments and Core CPI (or, what I call “inflation without all the nasty inflationary bits”). Finally, we recognize that this quiescent image of inflation clouded our vision, and encouraged an era of excessively accommodative monetary policy (low interest rates, set by the central banks), which led, not only to the creation of asset bubbles, but a culture of debt and an unhealthy reliance on the levels of asset prices (e.g. stock markets, property etc).

However, you may recall a couple of days ago, in my November 4th comment, I mentioned that: “suppressed inflation reporting was just one of the prerequisites for runaway money supply and irresponsibly lax central banking”. The truth is more complicated than this – mistakes on such a gargantuan scale tend to be founded on shreds of truth. To be completely above board, the reality is, there was some justification for responsibly running relatively accommodative monetary policy for the past 20 years. Not least because of a little phenomenon called Globalization, which flooded the World with assembled goods and consumer products via a viable structural unit-labour-cost imbalance which became known as “The Labour Arbitrage Gap”.

The fact that employees in the developing World could work diligently to produce goods at only a fraction of the domestic cost to the consumer nations was a powerful thing. That this productivity suddenly became viable after the fall of the Iron Curtain was more than just symbolic, it was the soil upon which the seeds of a privileged generation were sewn. Most of us have never known how or what a “normal” economic environment is (I’ll give the late Henry Allingham  an exemption!) we are wide-eyed children of the bull market. Rather than re-write the argument for other factors which influenced complacent monetary policy, I’m simply going to refer you to something I wrote a couple of years ago, way before the market crash and Lehman Bros bankruptcy (please bear that in mind when reading it!). It was a lengthy piece called Bernanke and The Butterfly, but I’ve extracted the relevant section, below:  

It started in Berlin

It is said that, by the fleeting power of consequence, a butterfly flapping its wings can, over time, conceivably create a hurricane on the other side of the World. The notion that something small can have huge repercussions in shaping something big is a powerful concept: we’ve come to call this “The Butterfly Effect”. Indeed, as one looks back over one’s lifetime, it causes one to wonder how things began, what were the proverbial butterfly-flutters that sparked the changes?

Could it be that, what started as just a glint in Gorbachov’s eye, evolved into Perestroika which, with the cooperation of far-sighted Western Leaders, led to perhaps the most captivating single political event of my lifetime: the fall of the Berlin Wall? The most daunting symbol of the Iron Curtain was destroyed and, with it, this book-marked the beginning of the end of The Cold War.

The Cold War was a World War, The Third World War, in many respects. This was not just about a couple of titanic superpowers engaged in an Arms Race for the sake of flexing their military muscles. For instance, over time, the repercussions of The Cold War snaked their way through the entire global economic system. Whether you were a city boy in London, a peasant farmer in Afghanistan or a government official in Korea, The Cold War was a true World War in the sense that it entrenched deep political divisions throughout the World and seemed to polarize the entire population of the Planet. Previously allied states, which shared prosperous and harmonious histories, were suddenly not on speaking terms and giving each other the Cold War Shoulder. The Barriers went up not just physically but culturally as well – in many instances even within countries and occasionally (as was the case in Berlin) the butterfly effects of fear, misunderstanding and animosity segregated neighborhoods within the same town and even families.

While the politicians and bureaucrats were in global gridlock, economic activity was always going to be constricted to a level significantly below its potential. The progression of raising global living standards suffered as a consequence and, as we are often made aware of, it was the people at the bottom of the pyramid, throughout the World, who probably had to bear the brunt of the distress. While occasionally appearing deceptively inactive to the masses, this latent war was, indeed, a silent killer in so much as is held back the rate of promotion of: more constructive symbiotic international politicking, free cross-border trade and so the obvious benefits of a well-lubricated global and international economic system, a phenomenon which we’ve come to know today as “globalization”.

Where am I going, what has this got to do with Investing?

Well, let’s just take one tiny step back…

The Dawn of a New Era

1987 saw the introduction of a bright, new Federal Reserve Chairman called Alan Greenspan, who immediately bolstered his credentials as a crisis manager during the great market crash in the latter half of that year. While this may have been (so far!) the most dramatic market correction of my lifetime, Greenspan stepped up to the plate to manage the situation. By making sure that the Financial System could still operate, despite the cataclysmic losses incurred by many, confidence was swiftly assured and the financial markets got back to doing what they do best: promoting ideas, sponsoring ingenious entrepreneurialism and occasionally letting poor companies fall, “creative creation with creative destruction”, I like to call it. This was central banking at its best and, here, Greenspan was at his most effective.

During the three decades after the 1989 collapse of The Iron Curtain the global economy has experienced unprecedented growth and remarkably benign inflation – albeit with a few hiccups along the way. But let us get one thing straight: while Greenspan deserves enormous credit for his management of the economy during the late 80’s, he did not bring down The Iron Curtain – the timing of the end of the Cold War was coincidental to the beginning of his tenure!

While much of the symbolism was occurring in Berlin, the economic effects were not only felt in Germany (or the US or USSR for that matter), indeed, there were far-reaching implications all over the World. The Barriers came down almost overnight, and so, with it, came the reversal of all the economic potential which had been held back in restraint during decades of political stalemates and frictional, trade-less stand-offs. The fall of The Iron Curtain opened the proverbial floodgate for free trade and it was here that the seeds of Globalization were sown.

The Evolution of Globalization

As we entered the 1990’s, the World seemed destined for a new era of prosperity and growth and nothing was going to stop us. I was only 13 years old when Greenspan began his tenure as the Chairman of the Fed and I was more interested in skateboards when The Iron Curtain came down, so you’ll excuse me if my recollection is a bit hazy. But, whether one agrees with my perception of the effects of these historic events or not, one cannot deny this: the build-up of tension as a result from The Cold War was a forceful, yet gradual, tectonic process. When that ended it was (relatively) very sudden and that released the pressure-valve on international and cross-border economic activity which was the precursor to the amazing growth and benign inflation that we have been experiencing for the past two decades. I’m not saying that central bankers did not have their role to play in the 1990’s, I’m just saying they were sailing with a significant tailwind. Times were good, and, as they say, a rising tide lifts all boats – this was the birth of globalization. There were massive global economic, sociological and political forces at play all working in the same direction: an unprecedented display of global economic harmony which would dwarf the reach and power of any single nation or institution and, in particular, any single person – even Greenspan. This was the dawn of inflation-free growth (everything is relative, of course!).

But this was just the foundation, just the beginning. Throw in the greatest gleaming innovation of this era, a little something called “The Internet“, and mix it with the backdrop of post Cold War optimism and you have globalization on steroids. And in many senses the stock market rally we experienced in the first half of the 90’s was entirely justified. There was genuine reason to believe we were in a new era, “this time it was different”.

Fantastic! The Global Economy had a double whammy, we had our cake and, by golly, we were eating it. Not one, but two massive forces working: demographically, socially, politically and economically to simultaneously elevate business and innovation and GROWTH higher while pushing poverty, unemployment and INFLATION lower. Yes I’m simplifying a lot, to get my point across about the change in sentiment, but at times it almost seemed that, no matter who or where you were in the World, life was getting better – for businesses, workers and consumers alike. But wait, just when we thought things were too good to be true, welcome the third contributor to the party: the emergence of the Emerging Market Economies – especially the BRICs and China-related economies. Suddenly, a new era of optimism and healthy growth gave way to a feeding frenzy among consumers and a spiral of euphoric optimism among the financial think tanks, business leaders and media pundits. Not only that, we all co-habit what is commonly regarded as “The Global Village”, synergies could be worked within the system. Cue: the massive Labor Arbitrage between the consumers (The Western Economies) and the producers (the then Emerging Market Economies – especially Asia).

The tidal wave of products, services, materials, opportunities flowing out of Asia was, not only contributing greatly to global growth, it too enhanced the tailwind of disinflation that Globalization was already providing. Not only were these (now three) phenomena a gigantic influence on the supply side of the equation, the surge of optimism and the spawn of an easy monetary policy style (“The Greenspan Put”, as it had come to be known), stoked confidence in The West to hysteric consumption patterns. By the turn of the century, we had grown intoxicated on our own potent cocktail of inflation-risk-free growth to the point that Greenspan himself (now, widely dubbed by the growing band of investment groupies and media junkies as “The Maestro”) called for an end to the “irrational exuberance” of asset price inflation. Alas, that was the last we ever saw of Greenspan’s attempts to diffuse bubbles and over-inflated asset prices.

Credit Only Where it is Due

Greenspan deserves only a fraction of the credit he gets for keeping inflation under control and stimulating growth for the past twenty years. It is quite likely that low inflation, globalization and higher growth would have presided irrespective of who was at the helm of the Central Bank for the last quarter of a century. In fact, by over-use of The Greenspan Put, our “Maestro” encouraged confidence to give way to complacency.

This unique globalization dynamic reinforced justification for the policies that central bankers were running. Give people in power a generation of World Peace and there’s no limit to the amount of damage they can do, eh? Seriously, though, the felicitous era of nineties set the tone and justification for the policies that central bankers plunged into the economy to the hilt. To an extent, they began to believe their own hype.

Notice, for the first time in all these lengthy (sorry) musings I mentioned China. In particular something called the Labour Arbitrage Gap. That’s for another day, perhaps. But China’s role in the financial crisis is far from inconsequential. That’s not to say that I believe China is “at fault”, as some politicians would have you believe, they are not. Let’s be clear, this was a disaster made in the West which spread to the East. As Stephen Roach says: “China didn’t force us to take on massive amount of debt”… more on China’s important role and the Labour Arbitrage Gap later…

Macro Data to Watch:

• Non-Farm Payrolls Jobs numbers in the US

Markets

Massive rally on great economic data. Unit Labor costs plunged. Now I can understand why the stock market would go up on that, it’s good for companies – but is it really good for the economy if everybody is earning less? What is particularly interesting about this rally though is that Gold rallied at the same time stocks rallied hard. Platinum hitting new highs as well.

European markets hauled back a pretty ugly drop to close comfortably up on the day.

The American equivalent of Boots, CVS, bucked the trend and plummeted 20% after losing pharmacy benefits contracts – one company’s loss is another one’s gain.

The volatility index (VIX) plunged but is still a way off it’s lows.

Global Stocks to Watch:

• This rally was pretty borad-based so there’s no specific sectors to watch.
• MacDonalds just hit a high.
• Unilever stock got hit despite sales beating estimates.
• Earnings:
  • DBS Bank (Singapore)
  • Lafarge
  • AIG
  • Berkshire Hathaway
  • Blackstone

Personally, I think Andrea should take time of to enjoy her aging husband’s retirement. After all, Alan Greenspan is now 83!!

Macro

Core Inflation: The Best Laid Monetary Plans of Mice and Men Oft Go Awry

Happy Guy Fawkes Day to all you Brits! For those of you who don’t know, Guy Fawkes is a guy from York (England) who tried to blow up the Houses of Parliament with a shed load of gunpowder – but alas, he was caught in the act on the 5^th of November. Still, on the 5^th of November of every year the ill-fated conspiracy plot is “celebrated” in true, satirically British, fashion, by the creation of a huge bonfire upon which sits a burning effigy of the thwarted terrorist.

Back to economics. Of course, our role should not be to destroy establishment like Mr Fawkes, but, rather, to continually question it. Especially establishment like: the government, the central banks, authorities and bureaucrats – all of whom have direct impact on our daily lives. My aggrievance over the way establishment has presented inflation over the past few decades is relevant to how the culture of debt infected the UK and the US. The systematic impairment of our economic vision with this fictitious fog of quiescent inflation facilitated the infusion (and indeed justification) of lax monetary policy for decades, specifically, under Chairman Greenspan. The consequential monetary complacency ultimately led to the perpetual formation, and thus the “Wealth Effect”, of continuous asset price inflation (i.e. bubbles) which, ultimately, even fostered a culture of economic dependence on asset prices. So I can’t help feeling that the misrepresentation of inflation numbers, and thus the inflationary threat to our economy, is deeply integral to the cause of this latest financial disaster.

On a more philosophical note, I am of the opinion that we live in a volatile and cyclical World, the tides, the seasons, the weather, physical human interactions and relationships, the days and nights, but most of all the greatest and most influential cycle of all – the cycle of LIFE. Life is cyclical, life is volatile. Indeed, the simple fact that we are all born into a reproductive life cycle, during which periodicity we will typically reproduce ourselves before expiration, directly affects our investment horizon. Thus, for our own protection, we are mentally hard-coded to be cyclical, volatile animals – it’s programmed into our DNA. We actually need this volatility, it keeps up sharp, it keeps us ready, it keeps us in shape and strengthens our immunity to shocks and change. When we try to sterilize society or the environment from the natural randomness we operate in too much, we may actually become weaker. The financial markets and the presentation of inflation are no different in this respect – both of which are simple byproducts of human interaction in a human system. Let’s get over the threats and scaremongering that establishment would have you enslaved to: natural cyclicality and volatility is not always a bad thing for humanity.

So you will understand my frustration at the efforts taken to surgically remove the volatility component out of inflation numbers, as Chris Martenson explains in his chapter on Fuzzy Numbers – especially when this has direct consequences for risk in the economy. In particular, I have issue with the change in monetary policy to focus on something called Core Inflation. This is simply inflation but without the input of Food prices and Energy prices.

…wait a minute… so we have a basket of goods for calculating inflation which contains everything from nail polish to flat screen TVs, but we deem Food and Energy as unworthy of a place in our primary inflation measure? A measure which now underpins the central bankers’ communication of their monetary policy?

• Under who’s tenure was this enacted?
  • You guessed it: Alan Greenspan
• What were the reasons for eliminating Food and Energy prices?
  • You guessed it: because they were deemed to be too “volatile”.

I’m not making this up. This is officially the justification behind The Federal Reserves new communication of Core CPI. There is another troubling aspect to this in that Food and Energy costs, as best I can make out, are more influential to poorer families, which have a larger proportion of their disposable income assigned to this – but that’s another debate and we shall have that another time. Never-the-less, omission of the fast-moving components of inflation means that the figure is often behind the curve in reflecting inflationary pressures. Note, this can be useful for a central bank ethos which seeks to promote the virtuous circle of continuous inflationary bias due to the accumulation of debt in society (which was in turn caused by inflationary bias).

What we have is a sterile, begnign, volatility-free measure of inflation being reported to the public and thus acted upon by the central banks, while we may, in fact, feel something very different in our everyday lives. This is perhaps less relevant today in the throes of a deflationary financial crisis, but back in 2005, the effect was quite clearly observable in my mind: “Looks like Deflation but feels like Inflation“.

Like the way a car driver is encouraged to cast a steady eye on the horizon, by focusing the attention of the public on the synthetically-smoothed inflation measure, Core Inflation (which is also manipulated by dodgy substitution and hedonic adjustments), the bumpy road of economic reality could be conveniently overlooked. Thus, establishment was able to put an “optimistic tilt” on how inflation (and thus their own credibility towards fighting it/controlling the economy) was perceived. This is important, I think, as it marks a subtle and yet poignant change in stance by all authorities but also ourselves and the culture we have created. Put differently, collectively (it wasn’t all Greenspan’s fault – let’s face it) we have managed to embrace a monetary faith which sets out to peg inflationary and economic expectations to some distant utopia while real, immediately observable hazards may be running amok. I’m reminded of Heath Ledger’s superbly delivered remark as The Joker in the film Dark Knight:

Nobody panics when things go according to plan… even if that plan is horrifying!

All power to the central bankers, I’m all for a bit more optimism in society, and if they can hoodwink us all into believing that the economic environment we currently live in is any safer, more certain, more predictable than preceding generations that’s probably a good thing for everybody – especially if they can boost their own credibility as inflation fighters in the process.

But the engineer inside me keeps coming back to Newton’s Third Law of Motion, which basically states that for every action, there is a reaction. The bus driver who gazes at the horizon gives his passengers a reassuringly smoother, more comfortable ride, but what happens when the vehicle hits traffic, or there is an accident ahead, or he needs to reverse or there are other “volatile events”? Does the driver ignore everything, choosing only to focus on the calm Core Inflation of the horizon? What happens when the public finally understand that there are repercussions to constructing an economic doctrine using inflation measures which do not accurately reflect the reality or (much more importantly) the public’s perceptions of reality? By dancing with the data, the central banks are not actually cementing any credibility – they are simply substituting one form of credibility for another. Up until recent events, the establishment, The Fed in particular, was purposefully out of touch with reality, they were dancing to their own beat and looking cool at the same time, which is agonizingly difficult to do (I know, I try it all the time!) … so it’s a great achievement for the establishment thus far… but that’s the thing about dancing: if you’re still doing it when the music stops, you look like a right plonker.

OK as I’m so obsessed with inflation and monetary policy, I may as well comment on Bernanke’s statement today – yes he kept the words “Extended Period” in the statement. To be honest, I didn’t understand the argument that he would ever remove this emphasis in today’s statement. But, more interestingly, he implied that the US central bank would not entertain the idea of withdrawing from their extraordinarily accommodative monetary stance until employment was showing signs of picking up. Did you get that? Not observable inflation (which is not accurately depicted anyway, for the reasons I mentioned above), not growth, but employment: a lagging indicator of economic recovery. Presumably, this was all on the provision that the manipulated and synthetically-smoothed Core CPI (another lagging indicator of inflation, as it excludes rapidly moving Food and Energy prices) remains relatively contained. The Fed is going to wait for inflation to be baked-in-the-cake (i.e. on a rip-an’-tear) before they even think about taking their foot off the money supply pedal. To be fair, that’s the only prudent thing left for them to do under the circumstances a natural consequence of the only viable option left for us: Hair of the Dog Monetary Policy.

Macro Data to Watch:

• Taiwan CPI
• ECB rates
• BoE rates
• US Jobs – initial jobless claims

Markets

See the price of Gold? Wow. Most people don’t like gold because they say it’s a play on either massive inflation or Armageddon – neither of which are likely. I have to say, I’m still wary of diving in despite the encouraging fundamentals around the World. But perhaps there is more to this than meets the eye. Perhaps people are indeed worried about inflation. Or perhaps it’s real evidence of investors and foreign reserves moving out of the Dollar and into other tangible currencies (i.e. commodities and precious metals).

The US stock market got sold heavily into the close on the news that congress would pass a bill limiting credit card rates – really, is it that significant? I guess so. Anyway, the market may have sold off in the afternoon but it still managed to close up on the day. The Dollar, however, got smacked. While the old relationship continues (Stocks up Dollar down) this seemed like a disproportionate sell-off in the Dollar. Worth keeping an eye on the Dollar (especially the USD/EUR) today.

Global Stocks to Watch:

• Keep an eye on Cadbury and Kraft today… will this takeover actually go through or will it just end in stalemate? Cadbury stock hit a low today.
• Look at all consumer finance stocks and related banking stocks after this move by congress on credit card rates.
• Earnings:
  • Toyota
  • Nikon
  • Asahi Glass
  • Commerzbank, Man Group
  • Adecco
  • Thomson Reuters
  • Unilever
  • Zurich Financial, Generali
  • Starbucks

Macro

After a Generation of Phony Inflation Numbers, the Devious Duck is now wagging the Dog by the Tail

Well yesterday I made some fairly outlandish statements – like for example that our inflation measures were being debased from reality. C’mon man, that’s a bit far fetched, isn’t it?

Well, actually, no. The piece I wrote back in 2005, Looks like Deflation but Feels like Inflation, was inspired by the price my wife paid for a haircut. It was a gut reaction to what I felt was a disconnect between the inflation we were “feeling” going about our daily chores and what was being officially reported. Specifically, I noted that while assembled goods - like TVs, computers, gadgets, gizmos and toys were indeed experiencing disinflation or even mild deflation (i.e. becoming more affordable) nearly everything else was inflating. What is more, if you imagine the numbers for just the average household spending, this latent inflationary undercurrent was causing more national discomfort than I felt was being reflected in the quiescent reported numbers and rosy government forecasts.

So how come my cost of living was becoming more abrasive while the Government and official bodies (like the Office of National Statistics, in the UK, or the Bureau of Labor Statistics, in the US) were producing numbers which showed only soft, benign, warm-and-fuzzy inflation? As it transpires, “fuzzy” is probably an apt word when applied to official inflation reporting. There was something missing in my mind. It did not matter how much the intellectual boffins and economic technocrats tried to baffle me with their jargon, my mind was made up, to coin an old phrase:

    “if it looks like a duck, swims like a duck and quacks like a duck, then it probably is a duck”.

This is a crucial point to understanding how we got into this crisis and so will give a much better idea of how we are going to come out of it. Tempered, suppressed inflation reporting was just one of the prerequisites for what was to become a runaway money supply train and the lax central banking which spawned the biggest financial crisis in living memory. It allowed central bankers (who, let’s face it, knew the truth behind the numbers and the underling assumptions behind them) to run monetary policy which was somewhat removed from the reality of the world we face everyday as ordinary people. As I alluded to yesterday, loose monetary policy with respect to inflation underpinned the asset bubbles which left us in this mess when they popped – so the methods by which we calculate inflation are important!

Office of National Statistics is a rather grand title for an organization isn’t it? Sounds authoritative – like we should listen to what they say and take heed. Bureau of Labor Statistics sounds equally authoritative, if not somewhat bureaucratic. Which is my point, the image of these institutions is built on an integrity and the devotion to real observable data, in other words: Facts. Nothing fuzzy, just simple reporting of collated, pure, raw data: Facts.

Inflation calculation should be simple: take a basket of everyday goods and calculate the price, then take the same basket of goods and calculate the price a year later. The difference in price is measured as inflation. If we start to make adjustments to inflation numbers for how we think the consumer will react to certain price changes in certain markets then this is not factual inflation, this is something else, we call it speculation. Speculation is not the job of the ONS or the BLS, that’s what all these independent analysts, economists, media pundits, bloggers, investors and politicians are for: they take the facts and then impute the results, derive the reasoning themselves and then make an educated “guess” or speculate on the outcome. If the number that arrives at the input to our economic model has already been meddled with, then the water has been muddied by somebody else’s opinion already. Thus, when we build assumptions into the economy, this is not an accurate depiction of the real world. Could it be that the quiescent, benign, warm-and-fuzzy inflation is just a phony utopia simply projected through the prism of the meddling establishment? Although, admittedly, I’ve perhaps put more thought into this than a normal husband would, it would certainly go some way to explaining the price of my wife’s haircut.

Rather than trying to fumble around with inadequate explanations about how tainted inflation numbers are calculated, I’ll just leave this to Chris Martenson who does a much better job of this in his chapter on “The Crash Course” called Fuzzy Numbers, it will take 15 minutes to listen to this, but it’s very easy to understand and it’s important you do so. I’ve mentioned Chris Martenson before; if you have not listened to The Crash Course, you’d do well to run through it in your own leisure some time. It takes a while to get through it, but it’s worth it. Most people think understanding economic, inflation, monetary policy is difficult – it’s not, really, as Martenson shows, it’s just been made to look that way by people no more intelligent than you or I.

These inflation numbers (and thus economic growth numbers) are quite deceiving and this is no accident. So let’s not beat around the bush, let’s call this what it is, anything which sets out to purposefully misguide people is what we call a lie. Simple as that. But there was more to “The Greenspan Put” (remember that?) than just his penchant for fuzzy numbers. I said suppressed inflation reporting was just one of the prerequisites for runaway money supply and irresponsibly lax central banking. There were other events and circumstances which made “Easy Al’s” cash-dumping monetary policy easier to implement and, indeed, justify, but the dodgy inflation reporting is an important point – perhaps I’ll talk about the other contributing factors another time.

What I think is important to understand is that this corruption of economic statistical data played a crucial role in the cultivation of asset price bubbles (first the Dot.com crash, then sub-prime melt down which led to a universal housing crash, then credit crunch which led to a financial crisis). As Stephen Roach puts it – we just lurch from bubble, to bubble, to bubble. This nauseous cycle of boom and bust is a reflection of how, with the help of fuzzy numbers and irresponsible central banking during the Greenspan Era, we have become reliant on what Bill Gross calls Paper Wealth Capitalism. You will recall on the 29th October I wrote this:

 This is because, in countries like the US and the UK: rising asset prices beget rising consumer confidence, which begets rising corporate profits which beget a stronger economy and thus higher employment rates. Contrast this to more traditional economic causality where: a fundamentally stronger economy was the foundation for productivity, which then fueled higher consumer confidence and thus rising stock prices. I’ve long been a skeptic of the relevance of consumer confidence numbers in the US (I think they’re more a reflection of the stock market preceding them than the other way around) and this new backward, bastardized economic ideology only reinforces this. The asset-price dependent tail is now truly wagging the economic-fundamental dog. But backward economic causality is a direct consequence of how, the UK and the US have evolved in the past few years to become the less balanced industrial models we find them in today…

After decades of Monetary Policy founded on phony numbers, we now have Political Policy (and the acclaimed standards of living therein) built on a phony economy. What kind of deep-rooted, organic, economic success is built on a reliance on the inflation of asset prices or ballooning stock markets? It should be the other way around, a strong economy should be built on more stable, resilient economic fundamentals. Rising asset prices, over the long term, should be a natural consequence of this solid economic footing. Consequently, when Paul McCulley says in his latest piece, Uncomfortable Dance Between the “V-ers” and the “U-ers”, that the asset prices can remain artificially disconnected from the real economy, he’s probably right. The two are no longer tightly coupled and, over time, have been systematically disassociated from each other. A clear example of this is the reaction of the equity markets to the recent actions by the Fed to keep interest rates near zero for an “extended period”, despite still very uncertain (that’s putting it mildly) economic fundamentals for the future.

Indeed, McCulley goes one step further and suggests that the stock markets may not be reacting to the fact that the World believes in a “V-shaped” recovery - they may be reacting to the fact that the economic outlook is so poor, the Fed will be forced to keep near zero for so long that it will inflate another asset bubble in the stock market. They’re betting on another bubble or hyperinflation – or perhaps even both. Ironically, the flip side of this is that; if the economy does show signs of improvement, this could be a bad thing for stock prices, as it implies that the Fed will engage its “exit strategy” from stimulus measures designed to support the economy at all costs (Extreme Monetary Policy I mentioed on 27th October) and thus the artificial support of equity prices will disintegrate. What a backward world we live in today – the phony-inflation-adjusted, asset-price dependent tail is now truly wagging the economic-fundamental dog. Or should I just say: The Duck is wagging the Dog?

Global Data to Watch:

• Keep an eye on ISM numbers coming out today, we don’t want that number dropping below 50.

Markets

Fairly dull day in the markets but events were completely dominated by Warren Buffett’s purchase of Burlington Northern Sante Fe railroad company. Yes, that’s right, America’s biggest investor just paid $26 billion in his biggest deal ever… and it’s a choo choo train company. He says: “it’s a bet on the country”. Wait a minute, I thought America was all about getting behind the wheel of a Chevy the size of a small family home, filling it with a vat of refined Saudi Oil and burning it down the Freeway. Now America’s richest man is telling us that his biggest ever transaction is in a rail company because they’re much more efficient at transporting goods around the country than trucks! Surely, there must be a mistake, I mean that kind of talk is almost… well… European… Trains!? They’ll be putting people on them next! Perhaps Mr Buffett knows something about a Second Stimulus Package that we don’t? A focus on physical infrastructure spending perhaps? A stimulus package which moves away from the asset-inflated duck and towards economically fundamental dog? That’s not just European – it’s practically Chinese! Warren just got on the infrastructure train – all aboard!

Anyway, I’ve always felt there was a resemblance between Warren Buffett and Thomas the Tank Engine anyway. What do you think?

Global Stocks to Watch:

• As usual the banking sector grabbing headlines:
  • RBS – most expensive bank bailout ever, stock got bashed – oh happy days.
  • HSBC took it on the chin in London – take a look at how the stock does in Hong Kong.
  • UBS had a disaster on earnings day.
• Earnings:
  • Nissan
  • Soc Gen, Prudential
  • Adidas, Marks and Spencer – pretty much a benchmark for UK consumption patterns.
  • Total
  • Newscorp
  • Time Warner

This is a great documentary that you can screen online by Frontline. I’m not going to tell you what it’s about because I know once I drop in that word “derivatives,” y’all be snoring.

I implore you that it is well worth a watch. I may have watched it twice.

(GiaVang.com.vn – Giá vàng Việt Nam và Thế Giới) – Bộ trưởng Tài chính nhóm nước G20 cũng đề xuất yêu cầu các ngân hàng tăng vốn và chất lượng tài sản nắm giữa để dự phòng khi kinh tế đi xuống.

Cựu chủ tịch FED Alan Greenspan cho rằng các ngân hàng nên được yêu cầu nắm giữ thêm vốn.

Lời kêu gọi này của ông Alan Greenspan tương tự như những gì đã được đưa ra bởi Bộ trưởng tài chính nhóm nước G20.

Trong bài phỏng vấn mới nhất với báo giới, ông nói: “Cần phải có yêu cầu về vốn chặt chẽ hơn đối với các ngân hàng ngay cả trong thời kỳ không khủng hoảng. Chúng ta cần những thay đổi lớn.”

Ông nhận xét kinh tế thế giới đang thoát ra khỏi khủng hoảng tài chính khá nhanh. Ông Greenspan đưa ra lời kêu gọi về vốn chặt chẽ hơn chỉ 2 ngày sau buổi hội thảo G20 tại London, Bộ trưởng tài chính nhóm nước G20 cũng đề xuất yêu cầu các ngân hàng tăng vốn và chất lượng tài sản nắm giữa để dự phòng khi kinh tế đi xuống.

Việc các ngân hàng tham gia quá nhiều hoạt động đầu tư quá mạo hiểm đã dẫn đến việc thua lỗ hơn 1,6 nghìn tỷ USD và chính phủ các nước buộc phải dùng tiền thuế của dân để cứu các ngân hàng, suy thoái kinh tế diễn ra trên phạm vi toàn cầu.

Ông Greenspan cho rằng không có điều gì có thể thay đổi được yêu cầu về vốn đối với các ngân hàng, không thể ngăn được khủng hoảng trừ khi người ta có thể thay đổi được bản chất con người.

Từng được coi là chủ tịch FED vĩ đại nhất trong lịch sử, ông Greenspan đã chịu nhiều chỉ trích khi thị trường thế chấp dưới chuẩn sụp đổ năm 2007. Là chủ tịch FED từ năm 1987 đến năm 2006, tháng 10/2008, ông thừa nhận mô hình thị trường tự điều tiết rủi ro mà ông đánh giá cao là một phần nguyên nhân gây ra khủng hoảng tín dụng chỉ xảy ra một lần trong lịch sử.

Cách ứng phó của ông đối với bong bóng tài sản chịu nhiều chỉ trích. Một số chủ tịch khu vực của FED như bà Janet Yellen, cựu phó tịch FED Alan Blinder và giáo sư đại học Stanford, ông John Taylor cho rằng cựu chủ tịch FED này đã duy trì lãi suất quá thấp trong thời gian quá lâu ở hồi đầu thập kỷ này, tín dụng lỏng lẻo đã gây ra bong bóng trên thị trường nhà đất.

Source: Alan Greenspan kêu gọi thắt chặt yêu cầu về vốn đối với các ngân hàng