“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.” — Alan Greenspan

“It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income tax during years of 5 percent inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 100 percent income tax but doesn’t seem to notice that 5 percent inflation is the economic equivalent.” — Warren Buffett “How Inflation Swindles the Investor,” Fortune, May, 1977

Ironically Greenspan was directly responsible for inflation while serving as Fed chairman and Buffett now advocates, and profits from, inflationary bailouts.

By Paul Chong Monday, 23 November 2009

Basic science tells us that to every action there is an equal & opposing reaction. It follows with the natural law of phenomenon of cause & effect. So with solving any problem, consideration lies with the cause not the effect – treating the cause & not the effect is the only logical solution.

US Dollar Being Shot At! Greenspan?

Do you remember the 1970s era of the Pyramid Marketing Schemes as deviously ingeniously devised by the Americans, particularly from the home ground of Utah? There was this mushrooming of the “Get Rich Quick” concept with ‘Holiday Magic’ spearheading & exploding the marketplace. It adversely affected the pockets & lives of many a home & individual. It was banned in Singapore & became restricted, operating as a Multi-Level Marketing Scheme. There are still such Multi-Level Marketing companies around, and in reality all its productivities benefit largely the company itself – the distributors getting the crumbs & pittance. Calling a rose by any other name still makes it smell the same.

Unlike the conservative British, the Americans are undoubtedly the most innovative & progressive with propitious modern ideas of marketing. In a word, they are the greatest “wheelers-dealers”! They preach & practise this philosophy right to the extreme – with success objective at all costs. The underlying theory maybe sound, but in practice it’s invariably unsound, as individuals have differential capability & capacity.

The Americans are famous for their doomsday & catastrophic shows on the big screen. This time they really hit the real thing – from Wall Street to the Main Street. But it’s not confined or restricted just to the American scene – it’s so monumental that the global economy is reeling & hurting. The cause of the Pyramid practice has evolved & resulted into the Domino effect. Like in a masquerade ball, the Americans have been wearing those loose cloaks with masks to cover up their faces.

Who’s to be blamed? Bush then & now Obama administration would like to attribute the alleged root of this economic crisis to the market itself – speculators, hedge funds, greedy bankers & lax regulators. Passing the buck does not eradicate the fact that it’s one Monumental Policy Failure on the part of the US government.

We are witnessing history unfolding right before our eyes. Two monumental things are glaringly obvious:

1. A dangerous collapse or near breakdown of the capitalist             financial system.

2. A massive outpouring of Free Money by the US government in   bailing out the “Big Boys” who are the real culprits of this             economic calamity. Hundreds of billions are spent in bailing out   the key major players – not at all benefiting the average American & sending the budget deficits going through the roof.

This Monumental Policy Failure of expanding money supply & credit growth is fuelling the economy negatively. The economy is imploding within with the exploding of endless printing of paper money. These two colossal events of the past 24 months with the collapse of Wall Street in 2008 & the irrational response of Washington in the outpouring of free money & the Federal Reserve printing money without restraint.

What happened initially with the huge speculative real estate bubble, which not even Greenspan nor Bernanke would now deny, has triggered off the ramification of the banking problems & the recession.

Many of us to be sure must remember the worthlessness of the Japanese money during the Japanese Occupation in both Malaya & Singapore. The Japanese were also running their printing press overtime to finance their warfare & occupation. Now in the present era, just ask any Zimbabwean what a billion or million dollar note is worth in his country.

US dollar is not backed by anything, not gold or silver or any tangible commodities and with its paper money running off the press like crazy, what can you expect of its worthiness in the final analysis? The confidence of the world for its currency is at a critical point, and all it takes is 24 hours for all the other nations to drop its use as the currency reserve.

As said, US may well be destroyed from within & from without – the wrath & non-confidence of the world may be brought to bear down on US all within the hours before the wake of Wall Street.

One Nobel Prize winning economist predicts a run on the dollar as “Probably the kind of disorderly run that precipitates a global financial crisis . . . ” while other monetary experts now warn “We are in the terminal stages of the world’s most gigantic pyramid scheme.”

To be forewarned is to be forearmed.

Take Care.

]]> http://minarchiste.wordpress.com/2009/11/20/comment-la-fed-a-gonfle-la-bulle/ Fri, 20 Nov 2009 13:33:51 +0000 minarchiste http://minarchiste.wordpress.com/2009/11/20/comment-la-fed-a-gonfle-la-bulle/

Voici un schéma illustrant le processus par lequel la Federal Reserve a gonflé la bulle immoblière de 2001 à 2007.

1) La Fed crée de l’argent à partir de rien. Elle peut soit la déposer directement auprès des banques ou l’utiliser pour acheter des titres de dette du gouvernement.

2) Le gouvernement dépense l’argent emprunté dans l’économie américaine. Par exemple, si l’argent est utilisé pour construire une route, l’argent sera dépensé en salaires aux ouvriers, aux producteurs de bitume et en profits pour les entrepreneurs.

3) L’argent se retrouve d’une façon ou d’une autre dans le système bancaire, sous forme de dépôts. Les banques utilisent ces dépôts pour faire des prêts, ce qui génère la création de nouvelle monnaie. Dans un système où le ratio de réserves est de 10%, le système bancaire peut multiplier jusqu’à 10 fois la somme des dépôts initiaux.

4) Les consommateurs dépensent ce nouvel argent, notamment en achetant des biens importés et des propriétés résidentielles. L’endettement des ménages augmente.

5) Les pays desquels les États-Unis importent des biens de consommation, notamment la Chine, conservent les dollars en réserve ou les utilisent pour investir aux États-Unis, notamment en achetant des titres de dette du gouvernement. Le gouvernement peut utiliser l’argent pour financer ses dépenses (retour au point numéro 2).

Les banques vendent aussi aux investisseurs des asset-backed securities (des titres de dettes titrisées). Ces titres permettent au banque de recycler ces capitaux et de les réinjecter dans le système. Toute cette liquidité met de la pression à la baisse sur les taux d’intérêt.

Résulats:

- La première chose à observer est qu’une certaine partie de l’argent nouvellement créé par le système sort du pays, et donc ne crée par d’inflation des prix aux États-Unis.

- Le reste de l’argent créé est canalisé, entre autres, vers la bourse, le crédit corporatif, les ressources (métaux et pétrole) et surtout le marché immobilier résidentiel. Ce n’est pas un hazard si l’immobilier a été la cible de toute cette spéculation; plusieurs facteurs ont fait en sorte que cette classe d’actifs soit l’objet principal de cette bulle.

- L’inflation des prix à la consommation s’est maintenue entre 1% et 4% durant cette période, malgré des gains de productivité dans l’économie (qui auraient dû engendrer des baisses de prix).

- Finalement, durant cette période, l’endettement total du pays (gouvernement, citoyens et entreprises) a atteint des proportions astronomiques.

Throughout the financial crisis, New York based artist Geoffrey Raymond has been hard at work creating portraits of controversial Wall Street figures.

When a painting is completed, Raymond exhibits them in front of Manhattan’s key financial venues, inviting people – with pen in hand – to write their thoughts directly onto the canvas.  Over the past year, Raymond’s paintings have offered a venue for the public to vent their anger.

I asked Raymond for a selection of his paintings for which he has also provided his insight on the works themselves. Click ahead to see select portraits of Wall Street Whipping Boys!

Make a Smilebox slideshow

Dans ce dossier, inspiré du livre “Where Keynes went wrong” de Hunter Lewis, je traite des principales idées de Keynes. La première partie traitait des taux d’intérêt, la seconde partie traitait de l’épargne, la troisième partie traitait de la bourse et de l’investissement, et la quatrième partie traite des récessions.

Keynes était d’accord avec le fait que les booms économiques génèrent de mauvais investissement, mais il prêchait que “c’est mieux que pas d’investissement du tout”. Keynes ne croyait pas que les récessions puissent au moins avoir l’utilité de “nettoyer” l’économie des industries/entreprises qui utilisent mal leurs ressources et de rediriger ces ressources vers les bonnes industries/entreprises (autrement dit, il ne croyait pas en la destruction créatrice).

Selon Keynes, aussitôt que des signes avant-coureurs d’un ralentissement économique se manifestent, le gouvernement doit mettre en branle un plan d’action radical pour intervenir et ramener l’économie en croissance (au plein-emploi). Il importe peu que ces dépenses gouvernementales soient vraiment utiles ou non, l’important est de dépenser cet argent le plus vite possible, de préférence dans les infrastructures. De toute façon, grâce au fameux concept keynesiens qu’est le “multiplicateur”, chaque dollar dépensé par le gouvernement durant une récession est multiplié plusieurs fois par l’économie.

Keynes croyait que le libre-marché n’arriverait pas à sortir l’économie de la récession par lui-même et que l’économie atteindrait un équilibre sous-optimal (avec un taux de chômage trop élevé). Il croyait que les salaires ne devaient ni baisser, ni augmenter durant les récessions. L’un réduirait le pouvoir d’achat des travailleurs, l’autre serait mauvais pour le “climat d’affaires” en réduisant les profits. La solution consiste à créer de la monnaie pour générer de l’inflation. Cette hausse des prix permettra aux entreprises de maintenir les salaires tout en faisant du profit. À cet égard, la déflation doit être évitée à tout prix; c’est du poison pour l’économie.

Finalement, Keynes préconisait que la banque centrale et le gouvernement agissent comme prêteurs de dernier recours pour le système bancaire, de façon à éviter les faillites bancaires. Ainsi, la banque centrale devrait fournir de la liquidité aux banques autant qu’elles en ont de besoin et ce à un taux très bas (non-punitif contrairement à ce que suggérait Walter Bagehot).

Réfutation:

Lorsque les “booms” économiques inflationnistes se mettent à dérailler, le marché lève le voile sur tous ces mauvais investissements financés par de la dette artifiellement abordable (facilitée par la création de monnaie) et l’économie frappe un mur. Contrairement à ce que Keynes pensait, on ne peut artificiellement maintenir l’économie en boom perpétuel sans créer d’énormes distorsions sur les marchés. À cet égard, les récessions viennent corriger ces distorsions et permettent à l’économie de repartir sur une base plus solide. Plus l’inflation a été sévère durant le “boom”, plus récession sera sévère.

En voulant éviter les récessions à tout prix, les théories de Keynes ne font que les prolonger, font en sorte que la reprise sera plus faible et que prochaine crise sera plus grave. L’interventionnisme keynesiens n’a-t-il pas échoué durant la Grande Dépression des années 1930s, prolongeant celles-ci jusqu’à la Deuxième Guerre Mondiale? Et que dire de la “décennie perdue” du Japon suite à la bulle des années 1980? Et de la bulle immobilière que nous venons de traverser, résultat inévitable de l’ère Greenspan (qui n’a pas laissé la récession de 2000-01 suivre son cours et qui l’a étouffée par une inflation démesurée, laquelle a gonflé une immense bulle immobilière). L’historique du keynesiannisme est en fait parsemmé d’échecs et d’inflation. La recette n’a jamais fonctionné et a toujours mené à des “booms and busts“, c’est-à-dire de violents cycles économiques.

En ce qui a trait au fameux multiplicateur keynesien, ce concept fallacieux dont les Paul Krugman de ce monde font encore la promotion, c’est une théorie économique fondamentalement erronée. Voici la formule:

       DY = 1 /(1-c) *  DI

où I est l’investissement fait par le gouvernement, c est la propension marginale à consommer (le pourcentage de chaque dollar qui est dépensé par les gens plutôt qu’épargné) et Y le revenu qui en résulte.

Ainsi, si la propension marginale à consommer est de 90%, le multiplicateur est de 10 fois, donc chaque dollar investi par le gouvernement est multiplié par 10 dans l’économie. Mais qu’arrive-t-il si la propension marginale à consommer augmente à 100% (i.e. les gens n’épargent plus)? Le modèle tombe à l’eau! D’ailleurs, aucune étude n’a clairement démontré l’existence de ce multiplicateur dans la réalité. Prenons par exemple celle de Christina Romer, présidente du Council of Economic Advisors sous Barrack Obama, qui a estimé le multiplicateur à 1.57x. D’autres études estiment qu’il est bêtement de 1x alors que d’autres l’estiment inférieur à 1x. Pour une réfutation complète du multiplicateur (qui serait trop longue pour ce billet), cliquez ici.

La meilleure façon de contrer une récession est de laisser le marché suivre son cours. Nous n’avons qu’à penser à la Dépression de 1921 aux États-Unis, où ni le gouvernement, ni la Federal Reserve ne sont intervenus. Cette dépression s’est résorbée d’elle-même, sans interventionnisme étatique. C’est d’ailleurs pourquoi les partisans de Keynes refusent à tout prix d’en parler! Par contre, les néo-keynesiens ont abandonné l’idée farfelue de Keynes selon laquelle un chômage élevé persisterait indéfiniement dans un libre-marché, sans intervention gouvernementale pour sortir de la récession (voir Modigliani et Patinkin). Une autre “intuition” de Keynes déconnectée de la réalité…

Quand aux salaires, le gel de ceux-ci a généralement comme impact de prolonger les récessions (nous n’avons qu’à comparer la Grande Dépression des années 1930s où les salaires furent gelés, à celle de 1921 où les salaires ont baissé drastiquement). La flexibilité du marché du travail est un élément essentiel pour sortir l’économie d’une récession et réduire le chômage. Les entreprises peuvent ainsi réduire leurs coûts (sans nécessairement mettre des travailleurs à pied), préserver leurs flux monétaires et rester en opération.

La déflation quant à elle n’est pas mauvaise en soit. C’est d’ailleurs un phénomène tout à fait naturel et sain: lorsque la productivité s’améliore, on fait plus avec moins, ce qui permet aux prix de baisser sans affecter les marges. Des prix plus bas signifie que le pouvoir d’achat et le niveau de vie de la population a augmenté et que de la vraie richesse a été créée. L’autre déflation, celle causée par la destruction de monnaie due au remboursement des dettes, est simplement le fruit d’une création excessive de monnaie qui a mené à de mauvais investissements, à du gaspillage de ressources et à un niveau d’endettement insoutenable. Ce réajustement est un mal nécessaire pour purger le système de toute cette dette et de toute cette monnaie artificielle, mais malheureusement, nos gouvernements veulent à tout prix l’empêcher en créant de la monnaie.

Finalement, la présence de la banque centrale comme prêteur de dernier recours crée un risque moral important pour les citoyens. Cette “fausse sécurité” permet et encourage la prise de risque excessive et mène inévitablement à des crises financières comme celle que nous avons récemment connue. L’expression “too-big-to-fail” et les “bailouts” existent depuis fort longtemps et tirent leurs origines, entre autres, du keynesiannisme. Cette promesse de sauvetage du gouvernement est malsaine et encourage les banques à étirer l’élastique au maximum.

FRONTLINE just aired one of the best documentaries, “The Warning,” on the recent financial collapse. It documents how Brooksely Born, the head of the Commodities Future Trading Commission, CFTC, attempted to regulate OTC derivatives in the late 1990s. She saw the impeding disaster years before it actually happened. Unfortunately, three idiots – Fed Chair Alan Greenspan, Treasury Secretary Robert Rubin and SEC Chair Arthur Levitt – actively sought to prevent the CFTC from creating of new regulations … even though the CFTC had the legal power to regulate.

Obviously, true laissez-faire economics was a failure. In the documentary, Greenspan admits to this to Rep. Waxman in a Congressional hearing. Today, Greenspan and Levitt are supporters of regulation after the meltdown. Too little too late.

(This column first appeared 6/18/05)

Quick. In your best eyes wide shut fashion, check out the marketplace and tell me which
direction is up. Which is down? It is harder than it sounds.

After ten years on a dizzy, vertigo-inducing rocket ship ride to incredible new heights, the G forces (gravity? greed? greenbacks? greenspan?) are finally getting to us. All we can sheepishly say into our headsets is: “Houston, we may have a problem.”

Here we are, standing on the precipice of a fantastic, dreamlike edifice of equity. We are on the roof of a skyscraper breathing rarefied air. Playing in the clouds. The planet of values we left behind a decade ago seems incredibly small and inconsequential. Things are going so well that maybe they are going too well.

We are worried that it will all go away overnight. We keep dreaming about falling. As a market, we have developed a bad case of acrophobia – fear of heights. It was ok climbing up the market ladder. We were so busy concentrating on the steps we didn’t have time to indulge our fears.  Now that we are up here it’s different.

Our brains are working overtime sending warning signals to the pits of our stomachs in the form of the dreaded “what-ifs”. What-ifs are like mind viruses preprogrammed into our genetic code or at least imbedded as negative engrams into our psyches from early childhood. We’re capable of spinning out a zillion of them whenever the going gets fearful.  What if interest rates go up? What if there is a bubble? What if I lose my job?

Imagine that you are minding your own business, riding a bicycle on the roof of the skyscraper. Your Mom pops her head out a window on the 97th floor and shouts: “Be careful, don’t fall.” The first thing you visualize is falling. The handlebars start to wobble and your balance goes. Suddenly riding a bike isn’t automatic. Instead you are watching a movie of yourself doing a long slow swan dive off the edge, straight into the abyss without a parachute.

When you are really high up, people always shout “Don’t look down!” Does anyone ever look down and only imagine themselves falling part way? Just one story? Nah. It is pretty much all or nothing. If you fall in your mind you usually hear the sound of a watermelon splattering on the sidewalk in your mind too.

When (not if) the market changes- if we are mindful, we will notice the market isn’t going up anymore. Our first overreaction will be that the market is going down and that the sky is falling. Even though not going up is not the same as going down, acrophobia is scary. And to quote one of my favorite malapropisms- “Been up so long, looks like down to me.”

I hate to break it to anybody but multiple offers, overbids, quick sales and sellers sitting
at the top of the heap in total control is not a normal market. It is an exceptional market that we have experienced for an exceptionally long time. Equity is not a God-given right. The market can giveth and taketh away.

But it’s ok if the market goes down a bit. If it tripled in the last ten is it so awful to give a
little bit of it back in the short term? If the market falls – it really doesn’t have to fall all the way, despite what Chicken Little or your Mother or your own Inner Phobic says.

Can our fear of heights really blow this whole thing up to the point where we actually believe the market can go from boom to bust in a day? The stock market went down 22% in one day in October of 1987 – can someone make a viable case that this is even possible in real estate?

When flying the space shuttle or standing on the edge of a tall building, quiet wisdom says don’t look up and don’t look down either. Instead pick a longer point on the horizon to focus on and keep your balance. Remember to breath and don’t forget to live. “The only thing we have to fear is the fear of fear itself.”

There are plenty of people who contributed to the sad state of our economy. But when it comes to bad decision making, these seven folks arguably deserve the bulk of the blame. (Want to add to this hall of shame? Follow the link

Justice For Crimes Against the American People and The World
click to watch how they did it

Arrest Them!

Dorie Greenspan has the life that I am trying to achieve by working hard and following my passion for food.  I love reading her blog for many reason.  Number 1, it is a well written blog.  Number 2, she blogs about great places and through her pictures, you can almost feel as though you are there with her.  Check out the blog and enjoy.

86!

Stephen Varela

I was pleased to see that the theme for the upcoming annual Interdisciplinary Council on Learning Disorders (ICDL) Conference is “Autism:  What Works and Why.”  I’ve been to too many government meetings on autism that focus on the size of the amygdala or genetic components rather than treatments, therapies, and services for children and adults with autism.  The ICDL does an excellent job of working to help improve the lives of children with autism.  I’ll be attending the three-day conference from November 6-8 for the third straight year.

Dr. Stanley Greenspan is the author of the book “Engaging Autism” and the founder of the Developmental, Individual Differences, Relationship-based (DIR) model of autism therapy.

The DIR model aims to improve social, emotional, and intellectual abilities in a way that is meaningful for the child rather than focusing on isolated skills and behaviors.  I wrote about the DIR model three years ago on my website, www.coachmike.net:

The DIR method focuses on the emotional development of the child. It takes into account the child’s feelings, relationships, and individual differences. DIR is based on following the child’s lead and enables the child to learn by doing what he or she likes to do in a fun and meaningful way that resonates most with the child. DIR focuses on the child’s skills in all developmental areas, including social-emotional functioning, communication, thinking and learning, motor skills, body awareness and attention. The DIR method can also help a child generalize skills initially learned through drills.

There are imitators who switch the DIR letters around, but DIR is the original.  I picked up Greenspan’s “Engaging Autism” again recently and looked at a few of the parts I underlined.  Here are a few of them that are certainly worth repeating:

• We now understand that the lines of early development are interrelated.  Rather than assessing language skills, motor skills, and social-emotional skills separately, we should look at how well these abilities are integrated, how they work together as a whole.

• Emotion always comes before behavior.  The child needs to enjoy relationships with parents, peers, and teachers in order to learn. Emotion is critical to brain development.

• We always recommend that kids have at least four playdates a week, so that their main source of companionship begins shifting from parents to peers…Mommy is still important for security, warmth, and problem solving, but not for going out and riding bikes together.

• We have never worked with a child or adult who didn’t have a desire to relate to others.

Other than the courses I took at Johns Hopkins University in its Graduate Certificate program in Autism and other Pervasive Developmental Disorders, the ICDL training is just about the best that I’ve experienced.

Berny Madoff Jailbird Ponzi Fraud Confession for creating epic financial crime and accepts his guilt on 11 accounts but not conspiracy charge View Bernie Madoff’s statement in jail that the “problem occurred when I made commitments for too
much money and then I couldn’t put the strategy to work. It was my mistake not to just be out a couple hundred million dollars and get out
of it.” http://www.sec.gov/news/studies/2009/oig-509/exhibit-0104.pdf Madoff was in the securities industry for 50 years prior to his arrest and that he “wrote a good portion of the rules when it comes to trading.”Madoff stated, “I’m very proud of the role I played in the industry… of course I destroyed that now.”
Madoff stated that he served on the committee as to who should register as Investment Advisers. He said that they were trying to get hedge funds to register, and stated that “nobody wants to register” because then, they would be subject to prosecution for fraud
MADOFF stated that when dealing with the SEC, there was “never any hint” that SEC was looking for signs of a Ponzi scheme or that they were looking at his trading. He stated that this was “primarily because of the reputation I had.”
Financier Madoff Appeal Defiance is a living prove of Global Financial Institutes and SEC Systemic Fallacy and a testament of FED’s systematic financial fraud with Lori Richards resignation as head of the Securities and Exchange Commission office that inspects money managers and brokerages after congress grilled her for Madoff’s Ponzi scheme. View Madoff logic of risques to monetize Ponzi scheme at WS
Inspector General Kotz’s eight-month inquiry exhaustive look at how the agency missed chances since 1992 to detect a $65 billion fraud that burned thousands of investors. The inspector faulted the agency for inadequately pursuing tips, assigning inexperienced staff to conduct reviews and failing to seek trading records that would have revealed the scam Madoff undertook for decades: http://www.sec.gov/news/studies/2009/oig-509.pdf Madoff Defiance to appeal his absurd sentence to 150 years jail term for creating epic financial crime and accepts his guilt on 11 accounts but not conspiracy charge which reveals the substance of his crime deeds . PSEUDO HEDGE FUND ENTERPRISE PONSI PYRAMIDE SCHEMES OF FINANCIAL RISQUES EPITOMISES WALL STREET SYSTEMIC FALLACY.

Ex-financier Madoff statement – confession for being guilty for creating epic financial crime in the history of Wall street while rejecting only the conspiracy charge which illuminates escape con-artist mindset due to cognitive psychoanalysis discovery method

Now a jailbird Bernard Madoff has committed financial fraud worth over $ 65 Blns and prosecutors reserved the right to pursue up to $170 billion in criminal forfeiture along with the 11 prosecution’s charges against Madoff carrie a maximum sentence of 150 years
Madoff Confession: ‘In more recent years, I used yet another method to conceal my fraud. I wired money between the United States and the United Kingdom to make it appear as though there were actual securities transactions executed on behalf of my investment advisory clients. Specifically, I had money transferred from the U.S. bank account of my investment advisory business to the London bank account of Madoff Securities International Ltd., a United Kingdom corporation that was an affiliate of my business in New York. Madoff Securities International Ltd. was principally engaged in proprietary trading and was a legitimate, honestly run and operated business.
Nevertheless, to support my false claim that I purchased and sold securities for my investment advisory clients in European markets, I caused money from the bank account of my fraudulent advisory business, located here in Manhattan, to be wire transferred to the London bank account of Madoff Securities International Limited.
Technologos Financier Madoff Appeal Defiance Global & SEC Systemic Fallacy Testament
There were also times in recent years when I had money, which had originated in the New York Chase Manhattan bank account of my investment advisory business, transferred from the London bank account of Madoff Securities International Ltd. to the Bank of New York operating bank account of my firm’s legitimate proprietary and market making business. That Bank of New York account was located in New York. I did this as a way of ensuring that the expenses associated with the operation of the fraudulent investment advisory business would not be paid from the operations of the legitimate proprietary trading and market making businesses.’

TECHNOLOGOS CINEMASCAPES ON BERNI MADOFF’s PSEUDO HEDGE FUNDS ENTERPRISE AS PONZI OR QUANT MINDSET PYRAMIDE SCHEMES OF FINANCIAL RISQUES EPITOMISES WALL STREET ABSOLUTE SYSTEMIC FALLACY WHILE SEC AS FINANCES WATCHDOG IS EVIDENTLY IRRELEVANT. Madoff fraud exposes the SEC’s void of supervising the fund or even being directly IMPLICATED in the conartist scheme by covering it as it never examined his investment advisory business as $50 Blns fraud deal.
Technologos envisions creating an economic science institution to define a new financial order taking ni account cognitive insights of mental and psycho processes where information technology construct intelligent finance models infrastructure global topology and new financial theory of global monitoring framework analising phony market ideologies fallacies http://www.xmail.net/technologos/ALAN2.html View NOBEL PRIZE ECONOMY WINNERS WEBCINEMA AS ANTIDOTE http://www.xmail.net/technologos/ANASH.html and http://www.xmail.net/technologos/ALAN1. Greenspan legacy of financial meltdown with his acceptance of conceptual flaw in the financial monitoring system : The Fed Can’t Become Overseer of Financial Stability
http://www.xmail.net/technologos/ALAN.html

clips of Ben Bernanke & Tim Geithner & Alan Greenspan & Hank Paulson taken from the movie Fall of the Republic
http://www.falloftherepubli…
released on October 21st 2009

Tags:
Ben Bernanke chairman federal reserve U.S. economy TARP bailout foreign banks Central Bank Liquidity Swaps Alan Grayson Tim Geithner Greenspan Hank Paulson Ron Paul Fall of the Republic President Barack Obama webster tarpley Nancy Pelosi max keiser peter schiff jim rogers marc faber mish Jim Cramer silver gold bullion recession depression

Read the short exchange below.  It’s a quote taken from Greenspan’s testimony to Waxman followed by a brief Buffet quote that we should all heed and to commit to memory.  The most interesting sentences to us are:  “Now in his case, the model breaking contributed to (some say it caused) the most costly meltdown in history. What if there was a flaw in the model that you base your investment decisions on? Would you be shocked? What would the implications be for you and your family?”

I Found a Flaw in My Model

REP. HENRY WAXMAN (D-Calif.): And my question for you is simple: Were you wrong?

ALAN GREENSPAN: And what I’m saying to you is, yes, I found a flaw….a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?

ALAN GREENSPAN: That is–precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

The part that worries me the most about what former Fed Chairman Greenspan told to Congress was the part about the “model” not working. This is one of the brightest economists ever. This is the guy that President Bush called a “rock star.” What he is saying here is that after 40 years of “considerable evidence,” the model broke. Now in his case, the model breaking contributed to (some say it caused) the most costly meltdown in history. What if there was a flaw in the model that you base your investment decisions on? Would you be shocked? What would the implications be for you and your family?

Warren Buffett reminds us: Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood…these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.

Eighty-five million barrels a day.

That’s the world’s current production of crude oil…and that may very well be close to the world’s PEAK production of crude oil. Although the recession caused a temporary decrease in consumption, demand is already bouncing back toward pre-crisis levels. Too bad production isn’t.

“Can’t we get more than 85 million barrels?” some folks are bound to wonder. Let’s look into that…

A couple weeks ago, I attended the 2009 international conference of the Association for the Study of Peak Oil and Gas (ASPO), out in Denver. Here’s the long and short of it. We’re in trouble. With a capital “T,” and that rhymes with “P,” and that stands for Peak Oil. By every measure, the world’s output of crude oil peaked between 2005 and 2007.

Yes, the worldwide total output of what we generically call “oil” has risen – slightly – in recent years. But that’s because there are increasing volumes of natural gas liquids (NGLs) in the mix, plus unconventional oil like what the global marketplace obtains from Canada’s oil sands. But the production of oil – actual oil – has peaked already. The future of conventional petroleum output is downhill, even with the future output from the deep-water offshore discoveries.

“There’s no such thing as West Texas Intermediate [WTI] oil anymore,” Peak Oil apologist, Matt Simmons, moaned to the ASPO conference attendees. Instead, the pipeline crossroads like Cushing, Okla., have become little more than “crude oil pharmacies.”

In other words, as the quality of the crude from the traditional US oil patch continues to degrade, oilmen must mix and match their product with “sweeter” forms of crude if they hope to sell it as the premium-priced WTI. Thus, operators at Cushing take whatever oil they can obtain from one place, plus whatever oil they can obtain from another place. They mix and match, and blend it all with synthetic crude from Canada. Maybe they add some imported oil juice and then send it down the line as WTI.

Along these same lines, Venezuelan economist Carlos Rossi stated to ASPO his analysis of oil trends in the US. “You are worried about your foreign oil imports now,” he said. “You in the US import about 65% of your oil today. You don’t like it. But if you follow the clear trends, by 2025, you’ll be importing about 92% of your oil. You’ll like that even less.” No doubt.

The market meltdown and world recession of the past year has bought some time. But the planet is still staring at an energy problem that’s coming down the tracks like a runaway freight train.

Sure, there’s a lot more oil “out there”…as in WAY out there – 150 miles offshore, beneath 8,000 feet of water and 20,000 feet of rock and salt. Yes, that offshore resource is out there, but it’s super hard to extract.

And so what? Aren’t the world’s oil companies busy developing these massive offshore deposits? Yes, but this development will take decades. It’ll take time and capital and expensive cutting-edge technologies, some of which are barely commercially viable.

Future energy supplies have never been more uncertain, according to Simmons. It’s difficult to say with specificity how bad things are, he says, because the data are so poor on a worldwide basis.

“Look at what happened with the bad information we had, or didn’t have, with the financial institutions over the past couple of years,” Simmons said at the recent ASPO Conference. “With our energy data, it’s worse. We’re in for some shocks that will change our lives in ways that’ll rival Pearl Harbor.”

Things could go wrong with energy supplies in any of a dozen places, according to Mr. Simmons. In Venezuela, the output of the state oil company PdVSA is declining at alarming rates due to political interference and underinvestment. In Nigeria, the low-grade civil war could quickly morph into a large-scale civil war. In Iraq, according to Mr. Simmons, “They’re in the dark about how to rebuild their oil industry.”

Closer to home, Simmons expects net oil exports from Mexico to vanish within 24 months or less. This event will play havoc with US refiners on the Gulf Coast. Mexico has simply delayed for too long its effort to explore, drill and rebuild its fast-depleting oil resources. Mexico is going to have to scramble to salvage something from its looming energy disaster.

But even without a supply shock, Simmons believes that the mere inevitability of declining production will cause oil to hit $200 a barrel by the end of next year. Longer term, Mr. Simmons expects to see oil at $500-700 per barrel. “People need to understand how expensive it is to obtain oil,” said Simmons.

Much of the world’s energy infrastructure is old and rusting and will require several trillions of dollars to replace – if it can be replaced. Furthermore, new technology is coming on line slower than most people anticipate. The deeper, more challenging environments are sucking down technology and money, and yielding less than expected in many cases. According to one study, only eight out of 100 major energy projects came in on time, were within budget and yielded the expected volumes of oil and natural gas.

The stark fact is that oil is going to get a lot more expensive and the bull market in oil will be firmly in place for a long time. Smart investors would take advantage of any corrections or dips to get themselves buckled-in for the ride.

Regards,

Byron King,
for The Daily Reckoning

Peak Oil – The Risks was originally published in the Daily Reckoning on 27/10/2009.

Multi-Year Stock Market Top Could Be In

by Michael Shedlock

Professor David Waggoner posted the following chart yesterday on Minyanville that I think is worth noting.

click on chart for sharper image

Professor Waggoner commented “The next intermediate level pivot down is around 882. It is a 50% retrace of the entire move up from the low and is a possible pivot for an extension of the entire A-B-C pattern off the low. It is also a natural support level as shown on the chart.

These intermediate level targets are based on the interpretation that the move up from the March low is a corrective retrace of a 5 wave set down from October 2007.

I concur with Professor Waggoner’s analysis.

The important point in above chart is that the move up from the March low is likely a correction, not the start of a new bull market. That information alone is worth far more than any details as to how the market may decline from here. Many patterns are still in play.

Depending on the index, you can count these moves off the bottom as a simple A-B-C correction as shown, or as an A-B-C-D-E wedge. We’ll know which one was correct in hindsight, but both suggest stocks will eventually make new lows – either sooner (in 2010) or later. A multi-year top could be in. Fundamentally, it should be in.

In the short-term, if we have in fact seen the end of the rally, the SPX will likely decline to the 200 day moving average, currently at 916. By the time we get there, it could be in the neighborhood of the 38% retrace line near 933. If things go quickly, it could be down there by the end of the year.

This is not a recommendation to short; this is a notice that risk is tremendously high and a top could be (and in my opinion should be) in. The market may have other ideas.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Mises Daily by Daniel Krawisz

In the great book Man, Economy, and State, Rothbard’s vast compendium of economic wisdom, we read much that has not yet been properly popularized. Rothbard’s production theory, for example, is quite different from the standard account. I have tried to distill this theory into the following synopsis, although it is by no means the only part of the book that warrants exposition.

Economics is about using our available means to achieve the best possible ends. Achieving an end is called consumption and applying a means towards an end is called production.

There are four broad categories of means, or factors of production, which are involved in achieving our ends. The first is labor, which refers to our own exertions, whether mental or physical. The second is land, which refers to any natural resource as it exists in nature. The third is time. At least a small amount of each of these is required in any production process.

Together, these three factors are called the original factors of production because they exist in nature prior to any human production. The fourth kind of factor is that which is produced, not because it directly brings satisfaction, but because it can be used in a different production process. The fourth factor is capital goods.

Since the time spent producing a good could have been consumed immediately as leisure, all production requires that one forgo present consumption for future consumption. In addition, one must have savings of some kind, enough to sustain one’s self until the production is complete.

For example, a hunter-gatherer, feeling the pangs of hunger, must renounce laziness immediately if he is to hunt any food. If, however, he has already indulged himself too long, he might not have enough energy saved up in his body to complete a single hunt.

One not only has the choice of whether or not to produce at all, but whether to produce via a longer or a shorter process. A hunter-gatherer might choose to gather fruits around him with his bare hands, or to fashion weapons and hunt animals, or to farm a plot of land.

Since, all things being equal, people will tend to prefer present over future consumption, it is necessary that a longer production process result in a superior set of consumer goods than a shorter one — enough so to induce people to wait to reap its benefits. The hunter-gatherer will choose hunting over gathering only if he finds the meat he will gain in the future, after presently constructing and using a spear, sufficiently more enticing than the leisure he could enjoy in the present.

An unavoidable feature of capital is that it wears out and therefore must be replaced. An economy that relies on capital must expend work simply to maintain its capital. In an economy that relies on capital, therefore, people must be continually willing to forgo present consumption to maintain their standard of living.

On the other hand, it is not necessary to save again; this is only necessary for the economy to grow, not to stay the same. The original savings are still around, embodied in the capital goods on which the economy relies. An economy with an abundance of capital goods has a long history of saving and thrift behind it, and as a result has a production process that is long, many-staged, and very productive.

One aspect of any production process that I have not yet mentioned is risk. Since the decision of what to produce takes place in the present whereas consumption is not available until the future, it is always possible that a person could choose incorrectly, and later realize that what he decided to produce was not the best use of his time and resources.

As we see, production requires the convergence of several conceptually different elements. There must first be savings. Then there must be factors of production (land, labor, and capital), which are combined over a period of time into a good that (we hope) will satisfy our desires. Each of these contributions is necessary regardless of whether the economy is capitalist or socialist, and if one contribution is not rewarded sufficiently, it will not be given.

Although a real person can contribute in more than one way, we can embody each of these contributions in a separate hypothetical person as a means to better conceptualize the value of each:

The laborer labors in exchange for wages and the landlord allows the use of his land in exchange for rent. In Austrian economics, the capitalist is the one who owns capital and rents it out; he does not own the business and he does not earn profits, only interest off the use of his capital good. The moneylender deals in the initial act of saving, which makes production possible. He must work now and wait for his reward later on. The landlord and capitalist have similar functions, so I refer to them together as proprietors.

Finally, the entrepreneur assumes the risk should the venture fail. He retains whatever, if anything, is leftover after the laborer, capitalist, and landlord are paid and his product is sold; and he pays the debt if there is not enough. The entrepreneur earns profits and losses based on his success in estimating the desires of his customers.

On the free market, goods can be valued in terms of prices, which say what sum of money might be exchanged for them. Prices tend toward the level at which demand equals supply and all the available stock is sold. If the price is higher than this, a seller has the incentive to bid lower to ensure that they sell their stock, and if it is lower, buyers have the incentive to bid higher so as to make sure they can get the goods they desire.

Consumer goods directly satisfy our desires, so the fact that they are demanded needs no explanation. Their demand and the available supply determine their prices.

Capital goods are not able to satisfy our desires directly when used, so the demand for them on the market is determined by the prices of the consumer goods that they produce. The demand for capital goods used earlier in production are determined by the prices of capital goods used later on, and so on.

The original factors of production (land, labor, and time) can be directly consumed because people can live on land and consume leisure time (instead of laboring). Therefore, the demand for original factors is caused both by their immediate use and their indirect uses in production.

There will also be a price for savings on the market, to induce people to become moneylenders and give up a given sum of money for a given length of time. This price will be determined by peoples’ preference for present consumption over future consumption, and it is called the interest rate. The interest rate is determined by peoples’ time preference, that is, the degree to which they prefer present consumption over later.

The rents of land and capital goods are determined by the interest rate as well as by their prices. If the rent is too low to enable the proprietor to maintain his property and earn enough on top of that, he will have the incentive to sell his property and go into moneylending or into some other kind of property. If the rent is too high, others have the incentive to become proprietors as well, thereby raising the price of land.

The entrepreneur will always attempt to earn the highest profits he can, and he is thereby induced to produce whatever is the most urgently demanded. Since the entrepreneur’s function is to accept risk, he does not receive any set price, but he gains profits or suffers losses depending on how successful he is at forecasting demand.

He provides laborers and proprietors with certainty in exchange for the hope of having correctly anticipated some new consumer demand. There will be profits available in an economy to the extent that such opportunities are available, but as the entrepreneurs alter an economy to better satisfy a given set of preferences, profits will become more and more difficult to earn.

With an idea of the overall workings of the free market, let us now discuss how the economy grows and shrinks. The ultimate size of the economy is limited by peoples’ time preference. Once the economy has reached its maximum size, the point where all the best uses of the available capital have been found by the entrepreneurs, then the economy can grow no more.

However, if peoples’ time preference decreases, and people find themselves more willing to invest rather than consume, more of them will become moneylenders. This competition causes the interest rate to decline and in turn enables the entrepreneurs to engage in newly profitable production processes.

Some productive processes, those that require more time or are more reliant on capital, then become feasible due to the lower cost of loans. There will tend to be positive overall profits in the economy because there are lots of new opportunities to take advantage of.

On the other hand, if time preference should increase, then fewer people will become moneylenders, the interest rate will increase, and the economy will become less productive overall.

What about the effect of a progressing economy on the laborers and the proprietors? If a factor of production becomes more productive, entrepreneurs will be willing to bid higher for it. In fact, each one must bid higher so as to prevent another entrepreneur from outproducing him.

In an economy that relies heavily on capital, factors of production will tend to be more productive. Factors whose supply cannot be readily increased, such as land and labor, will command a higher price in a more advanced economy. On the other hand, capital goods, though they might well be more productive, may become cheaper due to being produced in greater quantity.

The laborer, in particular, benefits from the progressing economy. Labor is an especially nonspecific factor, so that even those who have chosen to specialize in professions no longer needed in an advanced economy are still capable of doing much and of learning new skills.

As the economy improves, therefore, so will the productivity of labor, and hence so will its price. This does not necessarily mean that the price of labor will rise in terms of gold, dollars, or whatever money is in use; but rather that the price of labor will be exchanged for a larger amount of real wealth in an advanced economy than in a primitive one.

It is a common error in economics to believe the opposite, that more-productive labor will have a lower price, due to the fact that the same quantity of consumer goods can be produced with less labor. However, there is not some specific set of goods that is appropriate under all circumstances; the production of consumer goods is a decision limited by what is economically feasible.

Therefore, if labor becomes more productive, people will not simply go on producing the same goods they did before; they will produce more goods, and of a greater variety. Since an entrepreneur in a more-advanced economy stands to lose more production when he loses one employee, he will necessarily be more willing to pay higher wages to keep him.

Among anticapitalists, the contribution of the laborer is often seen as being somehow more legitimate than the others. Since the laborer physically builds the good that is produced, his contribution is often thoughtlessly seen as more real, more legitimate, than the others; but we have seen that production cannot take place without the contributions of the rest. Any attempt to give to the laborer what was meant for any of the other contributors makes production in an economy more difficult, and ultimately restricts or reduces the wages of labor.

The laborers, necessarily, are always paid immediately in any venture, whereas the landlord and moneylender must wait. The laborers, in addition, take on no risk in the venture. For each pay period, the laborers are paid the same amount whether the venture shows a profit or loss. Attempts to give the laborer what would otherwise have gone to the entrepreneur or moneylender reduces the incentive of people to become entrepreneurs or moneylenders.

There is no reason, therefore, that the laborers ought to share in the profits and losses of the ventures they work for. Laborers are perfectly able to buy stock in their own companies, yet generally they do not; this demonstrates that they are more interested in receiving the wages of labor than in contributing risk.

But what of the capitalist and landlord? Why should they get money for simply owning something? Yet the very fact that the capitalist and landlord own their goods and wish to obtain the highest rents for them ensures that these goods go to their most productive and most urgent uses.

It is necessary that the owner gain through his service as “gatekeeper” to the use of these goods; if he did not, he would prefer to use them for his own consumption rather than for productive uses more urgent to the economy as a whole.

Very well, but couldn’t this job be done by any rube, any idiot capable of identifying the highest bidder? Why should the benefits go to this person simply because of some historical circumstance that puts it in his possession, especially since he may have inherited his land or capital rather than earned it himself?

But as we have seen, the entire economy is built upon historical circumstances: without the historical act of saving, which is now embodied in capital goods, or the original act of appropriation which brought heretofore unused land into productive use, there would be no economy at all. So there is no particular reason why a person should not benefit because of history; we all do this every day simply by participating in the economy.

It is this very history that is negated by any attempt to prevent the rightful factor-owner from gaining his rent. Capital goods can be consumed without being replaced, and land can be abandoned and left unproductive. When the proprietor is prevented from earning his rent, he has an incentive to do precisely this. Why should he build or maintain what does not provide benefits, when he could instead focus on immediate consumption?

Someone might try to appropriate property and extract the maximum rent from it; he would therefore perform the job of the original proprietor. However, why would other proprietors maintain their property if they believe that property can be taken away?

Why would the appropriator maintain his property if he can just take more instead? If no rent can be extracted from a capital good, there is no reason to save up and buy it, and therefore there is no profit to entice an entrepreneur to produce it. Though we might be envious of the wealthy proprietors, no one can better allocate a factor of production than its rightful owner.

To own capital or land (whether bought or bequeathed) and to live off its rents should not be seen as unfair or

illegitimate; when we honor the property of a person who has inherited all his wealth, we are not honoring his right to lead a privileged existence as if he were a king, but rather honoring the original saver who bequeathed this property. In so doing, we demonstrate to other savers that their thrift will not be in vain.

Living off of capital can be seen as no different from living off a talent. Whether proprietors ever did anything to “deserve” their capital is irrelevant.

Their property helps to make us all more productive. We should appreciate that they have taken on the responsibility of owning and maintaining it. We should not look enviously upon the proprietors as somehow illegitimate or unfair; for when we infringe upon their property, ultimately we harm ourselves.

_______________________________________________________________

How the Free Market Works was originally published in The Ludwig Von Mises Institute blog on 27/10/2009

By Chuck Butler

Well, the non-dollar currencies didn’t enjoy such good news yesterday, as they got whacked a good one! After signing off yesterday, the non-dollar currencies continued to rally versus the dollar, and then the rug got pulled out from under them in a NY minute! What happened? The risk assets were dropping like the Cardinals’ batting averages at the end of the season. Well… Remember yesterday when I said that the data for the week looked like it might show some healing in the economy, which would be bad for the dollar?

Well, it wasn’t data that caused this move… It was a few things that I’ll list for you that ganged up on the currencies and gave the markets the thought that the US economy just might not be free and clear, which brought about a return of the “risk aversion” trades… Here’s the list that ganged up on the non-dollar currencies.

Things making the US economy look like it’s on shaky ground again include:

1. Rumors that first-time homebuyers’ credit will not be extended past November 30th
2. Rumors that the ING rights issue is not being well received
3. Talk of bank downgrades
4. Mention of a new bill addressing ‘too big to fail’ giving the government broad power to dismantle financial companies that get into trouble

I was asked by our public relations people to put together some thoughts for CNBC… So, the above stuff was what I put together… CNBC then asked for an interview… Well, this is where I get off the bus… Long time readers know that I’ve been ambushed twice at CNBC, and decided to not go back for a third time. So, even though this interview has little chance of an ambushing, since they asked for the info… The Big Boss Frank Trotter will be doing the honors at 8:40 CT/9:40 ET, today… So, don’t forget to tune in!

Another thing that may be giving the dollar some love is the yield on the 10-year Treasury… This yield, as reported in yesterday’s Pfennig, had bumped up to 3.50%, which had been the proverbial line in the sand in the past. 3.50% had been the level that had seen strong Treasury buying (probably by the Fed!) to bring the yield back down… But yesterday, we saw this yield inch higher to 3.54%… We should keep an eye out for this, to see if there is any slippage in the yield, because that would only mean one thing… The Fed is buying again! And that’s the reason the dollar got some love yesterday from this yield… Because so far… The Fed hasn’t gotten their hands dirty here… But should they, once again, it won’t support the dollar.

So… There you have it! Just when we thought the data this week would send the dollar to the woodshed, these things popped up to underpin the dollar! Hopefully, it’s just a case of sell the rumor and buy the fact for the non-dollar currencies, as most of this stuff was just rumors in the markets.

But it did get people/investors/traders thinking about just how oversold, in the short-term, the dollar was… It normally takes something like this to get those thoughts to come to the front of the class, as the negativity had such a stronghold.

We’ve seen these “risk aversion” moves in the past seven months, and each time they’ve only lasted a short while. But that doesn’t mean we’ll see the risk aversion campers leave shortly this time. They might… And they might not… Don’t you just love it? I know one thing for sure! The sell-off yesterday was swift and strong. For instance, the euro (EUR) was 1.5050 before the sell off, and is 1.4890 this morning! What does that look like to you? Buzz! If you said, “Chuck, it looks like a cheaper level to buy” then you may have won a free subscription to the Pfennig newsletter! If you did not have that answer, then there’s a free parting gift for you at the door! HA!

Yes, it certainly does look like a cheaper level to buy… Of course it doesn’t mean that tomorrow’s price won’t be cheaper, but given the history of the risk aversion reversals in the past, it doesn’t mean that it will be cheaper either!

And… According to Commerzbank… “It would probably be premature to call this the end of the dollar’s weakness. It remains under pressure due to the low interest rates and the resulting attractiveness as a financing currency for carry trades.”

I saw a story last night about the Brazilian real (BRL), and how the real has gained +35% versus the dollar this year, as a Big Mac in Brazil costs more than it does in New York and London… Uh-Oh! That Big Mac Index again! But that doesn’t scare the research team over at Goldman Sachs, for they still believe the real has room to gain versus the dollar… And you know me and the Big Mac Index… While it’s a “nice” measure, it’s not the holy grail of currency outlooks… I can point back to 2000 and 2001, when the Big Mac Index said the dollar was overvalued, but it took nearly two years before we saw dollar weakness… So, I don’t put much faith in the Big Mac Index, for short term forecasting. Not that I forecast – at least not in this letter I don’t – for I would be hung out to dry by readers if I got something wrong… I mean look at when I said I thought the Aussie dollar
(AUD) COULD go to parity, and it only got to 98.5-cents!

OK… Dr. Marc Faber was in the news last night, as he was giving an interview on Bloomberg TV…

“The dollar will become worthless when people eventually realize the fiscal situation in the US is a disaster. It will go to a value of zero eventually, but not right now. Looking at Mr. Obama’s administration, it should already be there.” He went on to say…

“In my opinion, about 50% of tax revenues will be used just to cover interest payments on the government debt. That’s unsustainable. Then you’ll really be forced to print money. The best investments right now are foreign currencies, commodities, and equities.” And then when asked about Fed Chairman, Big Ben Bernanke, Dr. Faber said, “He’s a money printer. He’s nothing else.”

Whew! That’s taking the whole shootin’ match of the government and the Fed, to the woodshed, eh?

For those of you keeping score at home, make sure you’ve jotted down the right figure of dollars that the US government and the Fed have spent, lent or guaranteed… $11.6 trillion!

OK… It looks like the last country that’s needed to sign the Lisbon Treaty, the Czech Republic, is going to sign it… Now, let me be perfectly clear about this… I don’t agree with the Lisbon Treaty, but the European Union has gone so far down this road now, that there’s no turning back, so you might as well go along and sign the thing, I guess… The one thing it does do, is underpin the euro… For if this Treaty did not get signed, the pressure on the euro would be great, because you would have had all the naysayers coming out of the walls again talking about a collapse of the European Union and a return to the legacy currencies. You know: Deutsche marks, French francs, Spanish pesetas, and so on.

Speaking of Europe… I know it’s not really November… But it’s close enough! The Norges Bank of Norway will meet tomorrow, and are expected now to raise rates, which would make them the first European central bank to raise rates… Notice I said “now”? Well, the rest of the crowd are jumping on my bandwagon that began a couple of months ago when I said that it was a race between Australia and Norway to be the first to raise rates… There weren’t many pundits out there calling for rate hikes… But as time has gone on, and they read the Pfennig, they’ve come along nicely! HAHAHAHAHAHA!

In the last couple of weeks, the Pfennig and I have been mentioned a couple of times by the best writer on the planet, Richard Russell… And now, I have learned that Harry Schultz has mentioned us in his most recent letter… The Pfennig is really beginning to get noticed, eh? That just puts more pressure on me to come up with fresh, informative information!

Hmmm… And then there was this… PIMCO’s Bill Gross, who is known as the “bond king” admitted that he “has some concern on owning Treasuries”… If Bill Gross has some concern, folks, shouldn’t we? I recently did about a 20-minute video for our friends over at the Sovereign Society on the Treasury Bubble… Sure wish Bill Gross would have said something like this when I was putting that video together! Imagine what I could do with a statement like that when I’m doing a video on the Treasury Bubble!

OK, to recap… The dollar came back with vengeance yesterday, after some rumors on the street led people to believe that things in the US won’t be free and clear after all, which led to risk aversion… We’ve seen this risk aversion before, and each time it hasn’t lasted too long… Dr. Marc Faber checks in with some comments on the dollar, and Bill Gross has some concern about owning Treasuries!

Rumors Kill the Currency Rally was originally published in the Daily Reckoning on 27/10/2009.

Greenspan – Poetry In Motion

“Also Check Out “Got Green?“ Mixtape @ Datpiff.com

GreenSpanMusic

Zero Discount Value of Gold in the Total Banking System

by Michael S. Rozeff

Recently by Michael S. Rozeff: The Zero Discount Value of Gold and Dethroning the Dollar

The U.S. banking system has many banks with large amounts of bad loans on their books. How do these bad loans affect the value of the dollar and gold? Specifically, how do they affect the Zero Discount Value (ZDV) of gold?

Zero Discount Value (ZDV) in review

An earlier article introduced the concept of gold’s Zero Discount Value (ZDV). Applied to the central bank whose only asset is gold and whose liabilities are currency and bank reserves, the ZDV is a value for gold such that every outstanding dollar liability in the central bank’s monetary base (currency plus bank reserves) is backed by an equivalent dollar’s worth of gold. It is what the dollar price of gold would be if the central bank’s liabilities were 100 percent backed or covered by gold.

To estimate the ZDV in this simple situation, in which no other assets than gold qualify as valuable assets, divide the monetary base by the number of ounces (oz) of gold that the bank holds. If, for example, 200 oz. of gold are held against 400,000 dollars of monetary base, then the ZDV is $400,000/200 oz. = $2,000 an oz. Only if gold is valued at $2,000 an oz. does every dollar that has been issued by the central bank correspond to one dollar’s worth of gold.

The market price of gold need not be the ZDV we estimate from central bank data. Gold has sold at a discount to ZDV for many years in the U.S., which is the main reason the term “zero discount” is used. However, there are market and arbitrage forces that move gold’s price toward the ZDV, if they are not thwarted. This statement is a special case of a proposition that applies to any enterprise whatsoever: Market forces tend to make the value of the outstanding liabilities equal the value of the outstanding assets, inasmuch as the cash flows or other returns of the assets are what give value to the liabilities and investors can usually find ways to buy either the assets directly or else buy the securities that represent them.

The statement that market value of liabilities equals market value of assets is so widely accepted as true that it is taken for granted. One can invest directly in the real assets of an enterprise (that is, in some replica or close substitute of them) or indirectly by means of the debts and stock that finance them. If the values of these two options are not in line, one invests in the less costly alternative. Possibly one arbitrages by selling or issuing the more costly alternative simultaneously. If the debts and stock have market values that are low compared to the market value of the associated real assets, then the tendency is for the real assets to be avoided or sold and the financial claims on them to be bought. Conversely, if the debts and stock have market values that are high compared to the market value of the real assets, the tendency is to buy the real assets directly and sell the financial claims. These actions align the market values on both sides of the balance sheet.

Gold is the real asset of the FED, and currency and reserves comprise its main liability. If the currency value is its face value and the face value is $400,000, then a 200 oz. holding of gold has a ZDV of $2,000 per oz. If the gold sells for less than this, there is a tendency to buy the gold instead of the currency, and vice versa. We observe that gold has in fact sold at a hefty discount to its ZDV for many years. The tendency to buy gold and sell the dollar has been seriously thwarted in the world’s monetary dealings, but not entirely so. Gold has shown a long-term tendency to rise as its ZDV has risen, even if the discount remains large. That tendency has been very far from being a smooth and continuous one. The market price depends on human recognition and action. It depends on many factors, including the actions of authorities, interventions, and sundry political matters. The result is a market price whose many ups and downs depend at times, sometimes long times, on factors other than convergence to ZDV. But still it is my judgment that ZDV exerts a very long-term pull or an attraction for gold’s price.

Bank Money and Bank Money Inflation

In addition to the central bank, the banking system has as its main component the many ordinary banks that make loans to the public and create bank deposits accordingly. Ordinary banks do not hold gold as an asset. Their loans are their main assets. What is the ZDV when we take these banks into account?

When a bank creates a mortgage loan or a business loan, it simultaneously creates a demand deposit or checking account in the name of the borrower, who then spends out of the account to buy a house or perhaps business inventory. Since checking accounts are used as money, the bank creates money when it creates loans. The accounting for this is a debit to a Loan account and a credit to a Deposit account. When loans are repaid, the borrower writes a check to the bank. The bank then credits the Loan account and debits the Deposit account.

We use demand deposits as money. We use currency as money. Time deposits are not used in everyday exchange, but yet time deposits are easily converted into demand deposits. If a bank certificate of deposit matures, we can instruct the bank to credit a demand deposit account. When it comes to getting gold’s ZDV, these distinctions among the various kinds of deposits are not relevant. What we want to know is what value of gold it takes to back up all deposits in full. I simply call all deposits bank money to distinguish them from the central bank’s money, which is the monetary base consisting of current plus bank reserves.

The backing of deposits is defined as the value of the bank’s assets that can be used to extinguish the deposit liabilities. Good loans are defined as loans that pay off the promised amounts. Good loans back deposits in the sense that when these loans are paid off, they provide their promised amounts of payments by borrowers to the bank. These payments then shrink deposits by the extent of the loans being paid off.

Bad loans are loans that fail to provide the full amount of the promised payments. Any losses in value of bad loans below the promised payments mean that borrowers have not collected enough dollars from their customers or jobs to write checks to the banks and reduce deposits. The dollars remain in the system as deposits. How so? If a borrower has bought a house on a mortgage loan that he cannot repay, he has written a check to the house’s owner. That seller then has those funds on deposit in his account. They will only be offset when the borrower pays off the bank loan. If he is unable to do this, then bank deposits or bank money do not shrink. But since the bad loan has reduced or no market worth, we see that bad loans reduce the loan backing of the still outstanding dollar deposits that were created against them.

Banks are supposed to write the bad loans off. This requires them to credit the Loan account to reduce it and debit an Equity account, which reduces it. When many loans go bad and reduce Equity drastically, the bank owners and/or managers have to get more equity capital somehow if the bank is to survive. If they do not or cannot, the bank fails and its creditors, the depositors, lose some or, in the worst case, all of their deposits.

Deposit insurance is a bank asset and a method to counteract the effect of bad loans. The extent to which it backs deposits is an important element that I discuss below. Until that discussion commences, it is convenient to carry this analysis forward assuming that there is no deposit insurance. Since I conclude later that deposit insurance does not substantially alter the situation, this assumption is warranted.

Suppose a bank has a simple balance sheet with $200 of good loans and $200 of deposits. The ratio of the market value of the deposits to the loan assets is 1. This indicates a viable or sound bank, that is, a bank with enough backing for deposits to reduce them when the loans are paid off. Now suppose that $40 of the $200 in loans are a total loss. The ratio of deposits to loans is $200/$160 = 1.25. This signifies that even if the loans are fully liquidated, the bank does not have enough bank money to pay off on its deposits.

A bank might have certain off-balance sheet assets to remedy such situations. It might also have off-balance sheet obligations that make the situation even worse. It might have a commitment by its owners to supply capital in such circumstances, or it might have lines of credit with other banks. It might have deposit insurance.

I define bank money inflation as an issue of bank money (deposits) not secured by additional assets of equivalent worth. In the preceding instance, there was no inflation when the deposit/asset ratio was 1. There was inflation when the bad loans produced a deposit/asset ratio of 1.25. Sufficient backing to the deposits means the same thing as no bank money inflation. Insufficient backing means inflation. As long as loan values keep pace with deposits, there is no bank money inflation, simply because good loans mean that loans are being repaid and that they are extinguishing the bank deposits and money as they are repaid. If the loan values are overstated, which has certainly happened in the past decade, then there is insufficient backing and there is bank money inflation.

Notice that bank money inflation does not refer to inflation of prices in the economy, whether of wholesale goods, consumer goods, stocks, bonds, labor, commodities, interest rates, or real estate. Analyzing how this vast array of prices relates to bank money inflation and to central bank money inflation is another ball of wax. I steer clear of mixing up that analysis with the one at hand.

Individual banks within the banking system can always inflate by making bad loans. If the bank’s loans are good loans, it is not inflating money. If the loans are bad loans, then it is inflating money. Critical to bank money inflation occurring is the nature of the loans the banks make. Are they good loans or are they bad loans? That is what determines the extent of bank money inflation.

Inflation (of bank money) is not an economy-wide phenomenon unless banks in general are creating loans whose values fail to keep pace with deposit liabilities. This can occur in a central banking and government-influenced system, even when banks compete with one another in making loans. A government might, for example, subsidize or use its powers to encourage the economy-wide expansion of an industry to which banks make loans that ultimately become bad loans due to overbuilding. The FED’s creation of monetary base can influence interest rates and create bank reserves that induce banks to make what turn out to be bad loans. I’ve discussed these issues at length in an earlier article. It seems to me that these kinds of actions are exactly what caused the present credit debacle, and I’ve argued that case in many articles. The government and the FED stimulated bank lending that gave rise to bad loans and the concomitant bank money inflation. Many observers saw this happening while it happened and others predicted it would happen. Warnings filled the air, but the authorities caused the inflation anyway.

Zero Discount Value with Bank Money

There are two layers involved in the banking system. There is the central bank that produces base money and there are the ordinary banks that produce bank money. Gold backs the monetary base, and loans back the bank money or deposits. If the bank money is fully backed by good loans, does this alter the ZDV? The answer we shall find is that it does not. If the bank money loses value because the banks experience bad loans, does that affect the ZDV? We shall find that it does. In this case, if the deposits are not covered by bank loans, they have to be covered by gold.

For purposes of thinking about the price of gold, which is my objective in all of this, I suggest we obtain a ZDV for the total system. I will sketch out how to do this by consolidating the banks and the central bank. I show that the ZDV for the total system cannot be any lower than the ZDV for the central bank alone. A chain is no stronger than its weakest link. Even if the banks make sound loans and produce no bank money inflation, the currency is still subject to the inflation produced by the central bank. This means that sound bank loans cannot lower the ZDV. Second, if the banks make unsound loans and produce bank money inflation, then the total ZDV must be higher than the ZDV of the central bank alone.

Suppose that the banks have Assets of 10, consisting of Reserves of 1 and Loans of 9. If these are in trillions, they are nearly the same as in the U.S. banking system. The Reserves are held as deposits at the central bank. The Liabilities are Deposits of 10. Equity is 0.

The central bank has Assets of gold, or G, which is a certain number of ounces of gold. Its liabilities are Currency of 1 and Reserves of 1. The Reserves are the deposits of the banks. This fifty-fifty split between currency and reserves is roughly the current situation at the FED. The ZDV of the central bank is (R + C )/G = (1 + 1)/G = 2/G. With gold later to be taken as 261.5 million ounces and the bank’s numbers expressed in trillions, the central bank’s ZDV is $2 trillion/261.5 million oz. = $7,648 per oz. This is actually quite close to the FED’s ZDV at present, which I estimate to be $7,456.

We consolidate the two balance sheets in order to obtain a useful picture of the total banking system. The Reserves disappear from the consolidated balance sheet, because they are an asset of the banks and a liability of the central bank. The combination has no net asset or liability arising from bank reserves.

In actuality, the reserves help the central bank control or influence the maximum amount of bank lending and deposit creation. That is their main role. Competition among individual banks by the production of bank notes and money is thereby replaced by a centralizing influence and a single form of bank money throughout the whole system. Consolidating the balance sheets does nothing to change this reality. It simply allows us to gauge values in an otherwise complex system.

The combined entity has two assets: Loans (L) of 9 and Gold of G ounces. Its Liabilities are Deposits (D) of 10 and Currency (C) of 1.

In order to measure a total ZDV in this situation, we need to incorporate Deposits and Loans of the banks. We need to use the idea that good loans back deposits and bad loans do not.

Consider the case first where all loans are good loans. Bank Reserves identically equal Deposits minus Loans, when all loans are good loans. In that case, ZDV = (D – L + C)/G. The numerator of the ZDV when all loans are good has Deposits minus Loans plus Currency. The denominator is G ounces of gold. The term D – L is the net deposit liabilities of the ordinary banks.

Gold still has to cover the issue of Currency. Since all the loans in L are good, they all subtract from Deposits, and that leaves D – L = R to be covered by gold too. The system ZDV equals the central bank ZDV.

In this particular example, total system ZDV = (10 – 9 + 1)/G = 2/G. The system ZDV is identical to the FED’s ZDV. The reason for this is that Deposits minus Loans equal Reserves, and that is because there are no bad loans.

The total system Zero Discount Value has to equal the central bank’s Zero Discount Value when the banking system’s net liabilities of D – L equal its Reserves. This occurs only when the system’s loans are good loans, that is to say, their market values equal their accounting values or values carried on the books of the banks.

The intuition of the unchanged ZDV in the good loans case is this. The central bank base money inflation gives a certain ZDV of gold. If the derivative bank money that banks then produce is backed up by sound loans, the inflation situation is not made worse. That is, there is no further bank money inflation, for loan repayments are capable of shrinking the bank money supply. We get bank money inflation, as shown earlier, if and only if the banks make loans that go bad. In that case we should find that the ZDV rises above the ZDV using only the central bank balance sheet, because more net deposits and thus money are being backed by the same amount of gold.

Bad Loans and the ZDV

Now we are in a position to evaluate the ZDV of gold when the banking system produces bad loans. The intuition in this case is that since bad loans cannot cover the deposit liabilities as fully as when they are good loans, the system’s net deposit liabilities rise relative to the same amount of gold held. Consequently, the money falls in value relative to gold or gold’s price rises in terms of this money.

To model this case, I modify the Loans (L) to be L – hL, where h is a positive number that provides a “haircut” to Loans. The number hL measures the loss in value of the bank loans. These loans may be carried on the books at face value, but their real market values are less. This is what justifies replacing L by L – hL, where h < 1. Then we find

ZDV = (D – (L – hL) + C)/G = (D – L + hL + C)/G = (R + hL + C)/G.

Hence, we obtain an important result: When bank loans are bad, the system’s ZDV has to be above the central bank’s ZDV alone. If loans are bad in amount hL, then G has to cover that amount of deposits in addition to covering R and C. R of these deposits have always to be covered by gold because every dollar of these deposits that total R in amount has been made through a FED loan whose excess earnings revert to the Treasury, so that they lack asset backing other than gold.

With a 10 percent loan loss, h = 0.1. I use the numbers (in trillions) that are close to those of the U.S. system, with D = 10t, L = 9t, and C = 1t. G = 261.5 million oz. Then ZDV = (10 – 9 + hL + 1)/261.5 = (2 + hL)/261.5 = (2 + 0.1(9))/261.5 = $11,090 per oz.

Looking at a range of h values that are less than 1, we get a range of total system ZDV values of gold:

In a previous article, I was critical of an estimate of $30,000 per oz. of gold. This analysis shows that to get such an estimate, one must assume that bank loans have lost 65 percent of their value. If real estate values have fallen by roughly 30 percent and affected total loan values by the same degree, then the estimates of ZDV are still very large. But since there are many good business and other loans, a loss estimate of 10–20 percent may be more realistic. Whatever estimate of loan losses one chooses, the ZDV ratio provides a way of translating it into a gold price estimate.

The large amount of bad bank loans in the U.S. banking system indicates a very serious bank money inflation and points to a much lower value of the dollar and a much higher price of gold. Before this bad loan debacle, the ZDV of gold of the central bank already was substantially above gold’s market value. The FED’s rush to supply Reserves raised it further, sending it above $7,000. When we bring bad loans into the picture, the ZDV is even higher.

I recognize that some loans can be structured and be so good that h > 1. The bank may have arranged its duration in such a way that when interest rates change, the bank becomes even more solid. However, for the system as a whole, this case is not typically relevant and surely not relevant at this time.

The FED once was restricted to issuing currency with a 40 percent backing of gold. If that has any relevance to what our society considered to be a reasonable amount of fractional-reserve lending at the central bank level, then the above ZDV values can be multiplied by 0.4 to obtain more conservative numbers. They are still very high, ranging from $4,436 to $9,943 in the event of a 50 percent haircut.

A feature of this model is that the ZDV is very sensitive to the destruction of loan values. A 10 percent drop in loan value (h = 0.1) caused the ZDV to rise from $7,648 to $11,090. That’s a whopping 45 percent increase. The reason for this is that the banking system is highly leveraged to gold. The coefficient of h is L/G, and the loans are very high compared to the number of gold ounces. Hence, a small decrease in loan values indicates a much larger loss in the value of the dollars whose backing is gold.

When loan values are impaired but the loans remain on the balance sheet, Deposits minus Loans no longer equal Reserves. If D = 10 and L = 0.9(9) = 8.1, then their difference is 1.9; but R = 1. This difference is what causes the system ZDV to go up. Banks have a hole on the asset side of their balance sheets. There is legal and regulatory forbearance, which is a postponement of action to remedy a problem of obligation. The situation is as if the FED were supplying phantom or shadow reserves. The effect of the bad loans on ZDV is somewhat the same as if the FED had actually created Reserves in even larger amount than they have. Deposit money stays in the economy while the real loan values decline.

The problem I raised at the outset was how the Zero Discount Value of gold might be related to the bad loan problems evident in banks. My way of solving this problem is to define a Zero Discount Value for the total banking system that consolidates the central bank and the member banks. We discover that when bad loans occur, the system ZDV has to be higher than the central bank’s ZDV alone.

The fractional-reserve central banking system has great problems. It pays to pin down what these problems are. Bank money inflation does not follow automatically from the fractional-reserve creation of money by free market banks not under the control or influence of a central bank. Free market banks are monitored by those who use their notes as money. The market punishes banks that inflate and rewards those that do not. Bank money inflation results from the fractional-reserve creation of money when bad loans result from the central bank’s fractional-reserve creation of bank reserves followed by deposit and loan creation. A key question is whether banks are necessarily induced to make bad loans when they find that they have excess reserves created by the central bank. In a previous article exploring this question, I argue strongly that the central bank’s provision of reserves does induce the system to make more loans that eventually go bad. In the same article, I point out that frequently government (as distinct from the central bank) gets into the act by encouraging banks to lend into certain industries and activities that eventually do not pay off, such as housing and railroad building.

Capital Infusions

Banks with bad loans have been raising funds by selling new equity and debt to the public and the government. They have raised something like $900 billion dollars in the last two years or so. Nearly all of this has been in the form of debt, not equity. About $200 billion have been used to sustain dividend payments, which reduce equity.

These capital infusions are not a free market phenomenon. A substantial portion of them came under a brand new FDIC program (Temporary Liquidity Guarantee Program) that fully guaranteed newly-issued senior undescured debt of FDIC insured banks, financial holding companies, bank holding companies, and savings and loan holding companies. A substantial amount (over $300 billion) still exists under this program which has recently been renewed for six more months.

The FDIC’s program was for up to $1.4 trillion. The FDIC could never have paid off on such a huge amount. It cannot pay off on the ordinary deposits it has insured, much less new debt of these companies. These guarantees are a fiction.

The financial system was given a reprieve due to a rush of government guarantees, some of which facilitated capital infusions that back deposits. They bought some time.

These desperation moves also revealed that the government-backed, government-run, government-regulated, government-insured, and government- manipulated banking system cannot stand on its own two feet. It is extremely untrustworthy. It remains alive today only because the American people retain confidence in “the government” and government guarantees. The system will collapse the moment that this confidence collapses, which will be when people at large realize that the guarantees mean little. In the meantime, the banking system is being transformed more and more into a government enterprise. The guarantees are a sign of that as are government’s direct infusions of capital. The absorption of the mortgage business is another sign of that. The regulation of executive pay is yet another.

At some point, the U.S. system will cross over into the existing Chinese communist banking system which is a state-run affair. All such systems collapse, although sometimes the news of the collapse is withheld from public attention.

Deposit Insurance

Deposit insurance is a bank asset that backs deposits. It therefore mitigates a rise in the ZPV. This means that the total system ZPV is an upper bound. The lower bound is the central bank’s ZPV.

Deposit insurance encourages the central bank to produce base money and the banks to produce bank money via loans, because they have a backup credit insurance policy that is typically underpriced to banks. Because it is underpriced insurance, deposit insurance encourages bad loans and inflation because the banks act as if taxpayers will bail them out and make all deposits good despite loans going bad.

In the U.S., the Federal Deposit Insurance Corporation (FDIC) assesses banks with insurance fees. The fiction is maintained that the banks co-insure each other. As long as failures are few and loans are good, this fiction can be maintained. This system can survive if bank loan risks are independent of one another and not too large. The banks together build up an insurance fund asset that stands behind deposits, in which case inflation is mitigated when loans go bad in amounts that threaten deposits.

But this system does not work if many kinds of loans go bad at the same time as in a widespread recession, for then the insurance fund is insufficient. That is currently the case.

The FDIC protects about one-half of bank deposits. If one believes that only the other half is subject to lower loan backing, then one can easily modify the ZDV model by reducing the haircut factor accordingly. But where in fact is such backing to come from? Who is going to pay for it? Who is going to pay for the insurance of deposits? Who is going to remedy the hole on bank balance sheets due to trillions of dollars of bad loans?

The FDIC fund is almost broke. The FDIC will assess banks with higher fees. That has to be a trivial amount compared to the amount of bad loans. The FDIC will borrow billions from the Treasury. How long will it be before it collects enough fees from banks to repay such loans? It appears that taxpayers will be making good the bank deposits for a long time to come. However, the taxpayers are in large part the same people who are the depositors! They cannot back up their own deposit accounts. The idea that the Treasury and thus taxpayers save their own deposits is also a fiction.

As long as the FDIC has only to deal with isolated bank failures spread over time, it can go on. In times like the present when failures are widespread and pervasive due to bad loans that are worth much less than deposits, the entire insurance scheme is revealed as a fiction or a fraud. People who believe that their deposits are insured are not seeing that in their role as taxpayers, they are being made to insure their own deposits.

The FDIC often merges bad banks into good banks. The insured depositors do not lose. The bad loans are either absorbed and worked out or written off. In either case, loan values remain below deposit values. Such mergers do not magically create value. The inflation does not disappear. The money is still in the system and supported by lower loan values.

It seems that no matter how one looks at this, the deposits remain alive in the economy while the bad loans mean that the backing has fallen. If there were truly an exogenous deposit insurer, who paid the banks compensation for their bad loans, the bank money inflation would be mitigated. There is no such sugar daddy. The banks have not put enough money into the FDIC piggy bank over the good years to pay for the lean years. The taxpayers can’t bail themselves out.

I conclude that, although the Zero Discount Values for gold seem high, they are accurately reflecting the facts of the case.

October 27, 2009

Copyright © 2009 by LewRockwell.com

The Best of Michael S. Rozeff

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Twelve Reasons For A Job Loss Recovery

by Michael Shedlock

I have been talking about the Job Loss Recovery for quite some time. Here are a few recent examples.

July 14: Bernanke Sees Chance of Jobless Recovery

Given that the Fed’s first mission is to delay, confuse, hope, and otherwise attempt to buy time while engaging in wishful thinking along the way, that Bernanke is willing to admit this may be a jobless recovery is a sign that things will likely be at least that bad. In other words, prepare for a job loss recovery.

August 3: Thoughts On The “Recoveryless Recovery”

Most know that I am in favor of an “L shaped recession“, but that definition includes a “WW” or even a “WWW” where the economy slips in and out of recession for a decade, as happened in Japan.

August 6: Dismal Unemployment Situation In Chart Form

Job Loss Recovery

The last three recessions are unlike the eight preceding recessions. For numerous reasons described below we are heading for another job loss recovery.

Job Loss Recovery Detail

click on chart for sharper image

If the pattern holds, unemployment will rise until 2011 or beyond.

So while everyone is tooting horns and cheering the end of the end of the recession before it has even ended, those graphs and comments from Bernanke himself will put the pending job loss Recovery into better perspective.

What is bringing this idea to the forefront now is all the enthusiasm over what is destined to be the weakest recovery ever.

Others seem to be catching on.

Rebounding Economy Shedding Jobs

Please consider Experts see rebounding economy shedding jobs.

Forget a jobless recovery. The economy may be entering a recovery with job losses.

Third-quarter estimates this week are expected to show that the economy grew for the first time since the quarter ending in June 2008. Despite the estimated 3 percent expansion and a stock market that has been on a tear since March, hundreds of thousands of people are still being laid off each month.

Eight million jobs have been lost nationwide since the recession began two years ago, and by some measures workers face the worst job market since the Depression. The average laid-off worker has been without a job for 61/2 months, a post-World War II record. Many of those workers will never recover financially.

California’s hole, deepened by a state budget mess and volatile tax system, is far worse: Unemployment is at

12.2 percent, third highest in the nation; and adding discouraged and part-time workers puts it over 20 percent.

“It’s not even a jobless recovery; it’s a recovery with more job losses,” said UCLA economist Lee Ohanian. “The idea of having essentially no net job creation after a remarkably severe recession is a real pathology for the U.S. economy.”

‘Painfully weak’ job growth

Top White House economist Christina Romer of UC Berkeley told Congress on Thursday that employment growth could remain “painfully weak” through next year, and that the largest effect from the $787 billion stimulus enacted in February, mainly aid to states, is past. By mid-2010, she said, the stimulus will no longer contribute to growth.

Alarms are ringing at the White House and in Congress. But with a mind-boggling $1.4 trillion deficit this year, Democrats have used up their bullets. The word stimulus has such a bad connotation that the term has been banished from new efforts to goose the economy and help workers

Employment mystery

Economists are puzzled as to why job growth has slowed, citing everything from higher health care costs, to higher productivity, to Chinese currency manipulation.

“The answer is, we don’t know,” said Tim Bartik, a liberal economist with the Upjohn Institute for Employment Research in Michigan who is proposing a tax credit for employers who hire new workers.

There Is No Mystery

Of course we know why job growth has slowed. Here are 12 good reasons.

1. We consumed more than we produced for a decade. Consumers are deep in debt and need to take care of their balance sheets.

2. We built enough houses for 15 years in a 5 year window.

3. People thought home prices would rise forever and borrowed against their homes. They are now underwater and cannot sell or move.

4. There is rampant overcapacity everywhere. We do not need any more Walmarts, Pizza huts, nail salons, Targets, Home Depots, Lowes, gas stations, grocery stores, or anything else.

5. Global wage arbitrage and outsourcing.

6. Boomers heading into retirement are scared half to death. They will not be spending or traveling as much as they thought. Indeed they will be attempting to downsize their lifestyle.

7. Attitudes everywhere have changed. People have finally caught on to the idea that home prices do not always go up. Businesses have caught on to the idea that home prices and commercial real estate does not always go up. Thus banks have tightened lending standards and consumers are reluctant to borrow.

8. “Frugality is the New Reality”. Here is a Search for the word “frugality” in this blog.

9. Misguided federal tax policy. The administration plans to raise taxes on the wealthy. On top of that the health care plan is going to be very costly for small businesses. Thus the administration has inadvertently given small businesses two more reasons not to hire. Instead the administration should be slashing corporate tax rates.

10. Government Pension Plans. States are raising property taxes to help fund pension plans that have blown up. This is a drain on the economy. These plans need to be killed. Please see California Treasurer Spanks Legislature Over Pension Reform And Reckless Spending for an interesting rant about the pension mess in California. Most states are in the same boat, although California is the worst of the lot.

11. Stimulus Spending. Japan has already proven that Keynesian and Monetarist solutions cannot and do not work, yet we try anyway. Please see Will Stimulus Take Hold? for details.

12. Deficit spending in general. Spending what you don’t have and cannot afford never solves anything. We can no longer afford to be the word’s policeman but still attempt to do so at enormous cost. Indeed, there are many things we cannot afford and do anyway. As a result, interest on the national debt is soaring, the dollar is weakening, and this is drain on the real economy regardless of what the stock market thinks about it.

Tax Credits And Other Bad Ideas

Giving tax credits for hiring cannot possibly accomplish anything worthwhile. Businesses are not likely to take on needless expense just for a tax credit. They will just hire who they were going to hire anyway.

Of course the might be exceptions. For example: Give me a big tax credit and I will hire my wife. Our pre-tax household income would not change one iota but our after-tax income would change by the amount of the tax credit. While this would be worthwhile to me, it does not seem to be an effective way to stimulate the overall economy.

Returning to the article for another ill-advised solution….

University of Maryland economist Peter Morici said the administration’s efforts to restore growth by directing spending to such things as alternative energy are too expensive for the number of jobs created and ignore larger problems in the economy.

“You can’t grow with a huge trade deficit,” Morici said. “If you don’t revalue the Chinese yuan against the dollar you can’t get out of this mess, and if you don’t do something about oil imports you can’t get out of this mess. Industrial policies won’t fix it.”

Morici is correct about the Obama Administrations misguided energy plan. However he is wrong about the trade deficit.

According to Rothbard “More nonsense has been written about balances of payments than about virtually any other aspect of economics.”

Inquiring minds are reading Does the widening US trade deficit pose a threat to the economy? by Frank Shostak.

Most economists are of the view that the ever-growing US trade deficit and the subsequent expanding foreign debt pose a threat to the well-being of Americans. What is then required, so it is held, is to set in motion policies that will help curtail the widening trade imbalances between the United States and the rest of the world. Focusing on the trade deficit as the supposedly major problem of the US economy only diverts the attention from the real culprit, which is the US central bank.

What matters for the process of wealth formation is the flow of real savings. The balance of payments statement doesn’t provide such information. Consequently, it is not possible to determine the implications of a given state of the current account on the well-being of Americans without information regarding the state of the flow of real savings. Therefore various pessimistic assessments regarding the US economy, which are based on the state of the balance of payments, are likely to be without much foundation.

For a complete rebuttal to the trade deficit myth, please read Shostak’s article in entirety.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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By Bill Bonner

We’re heading for the hills…really!

Last week, stocks went up. Stocks went down. Not much was proved one way or another. The week ended in a draw, as near as we can tell.

But we think we are making progress in understanding what is going on. The private sector is de-leveraging. Now, it’s the public sector doing the heavy lifting. It is leveraging everything it can.

Leverage in the private sector led to the banking crisis/bear market of 2007-2009. Debt always leads to trouble. Next up: a crisis in the public sector.

But wait…hold on…not so fast…we haven’t reached the end of the private sector crisis yet! Bank lending is still falling. House prices are still falling. Unemployment is still falling. Soon, stock prices will be falling again too…

First, let’s see what’s in the headlines. Last week there was a lot of press about the pay czar and his efforts to limit compensation in the companies that the feds bailed out. The public and the news media love this sort of thing. It’s a battle between the greedy rich and the public interest, or so they believe. The public hates bankers. But they don’t want to see just pay capping; they want to see knee-capping. We’d like to see it too. Or maybe public flogging. Or at least a lapidation or two.

But our true sympathies are with the greedy CEOs. After all, they stole the money fair and square. They should be allowed to keep it. The feds wanted to leverage up the financial sector by giving money to the banks. What’d they expect? The bankers took it.

Yes, the financiers are paid outrageous amounts of money – far beyond anything they are worth. In fact, if you studied it carefully, you’d probably discover that their net contribution to the betterment of mankind is now negative.

The bankers are betting that the money they were given by the feds will be worth less next year than it is this year. So they exchange it for everything and anything, confident that when it comes time to pay it back it will be even easier to come by than it is now.

So far the bet has gone their way. Copper has doubled. Gold is up 20%. Stocks markets all over the world are up 60%. Foreign currencies, too, have beaten the dollar.

Will the wager against the dollar continue to pay off? Well, that’s the big question. If so, you should stay in stocks, gold and commodities. If not, you should move to cash.

But it hardly matters to the gamblers. They’re playing with someone else’s money! If the bets go well, they pay themselves huge bonuses. If they go badly…well…hey…gimme a bailout!

In the long run, bets against the dollar are almost sure to turn out okay. All paper currencies go to zero, eventually. But in the short run, who knows? The whole world is betting against the greenback. With such a massive short position against the buck, it would be just like Mr. Market – aka Mr. Mischief- maker — to send the dollar up.

But you can’t blame the bankers. They’re performing a very valuable service. They are helping to separate fools from their money. Too bad we taxpayers are the fools…

Among all the whiners and kvetchers about bankers’ huge bonuses hardly a single one draws the obvious conclusion:

That them that deserve to go bust should be allowed to do so.

“I remain of the view,” writes Martin Wolf, a bit pompously, in The Financial Times, “that the only thing worse than rescuing the system would have been not rescuing it.”

He’s welcome to his opinions. And if he used his own money to bail out the bankers we would have no objection. In that case, it would just be a futile and foolish act. Instead, he insists upon using our money…which raises the charge from stupidity to larceny.

Another message that came through last week was that the real economy is not improving. Good news came in from several quarters. But the news that really counts – housing prices and jobs – was bad.

“It’s all bad. That’s all we know,” said John Stepek, editor of MoneyWeek. “People ask if we’re going to have inflation or deflation. The bulls think we’re going to have inflation. The bears bet on deflation. But I’m not sure it matters. We’re probably going to have both.

“The point is, whichever we have, it’s going to be the bad sort. Neither inflation nor deflation is necessarily bad. Prices have to adjust. That’s how the market conveys its signals. When prices rise, it tells producers to get busy and increase output. When prices fall, it tells them to lay off. In the natural order of things prices usually fall. Or, they should fall. This is ‘good’ deflation. It just means that producers are becoming more efficient, as they should. There’s good inflation too – when prices rise due to increased real demand. When people earn more money, they can buy more things; prices rise.

“But what we’re going to see is bad. Bad inflation. And bad deflation. It is the result of monetary problems and mismanagement. And it is going to send all the wrong signals and inevitably make things worse. First, the deflation is bad because it is result of a massive de-leveraging accompanied by a write-down of debt and assets. It’s a depression. Or a major recession. Or a ‘great contraction.’ Call it what you will. It’s a deflation in which prices fall…and it’s not going to be any fun.

“Then, there’s most likely going to be bad inflation too – caused by the central banks printing too much money. This is bad inflation because it is just an increase in the quantity of paper money, not an increase in real demand.

“We don’t know exactly what is coming. But whatever it is, it will be bad.”

Another big item in last week’s financial press was the “Cash for Houses” scheme. The feds give new house buyers an $8,000 tax credit. But since not all new buyers buy because of the credit, the actual cost to the government per additional new house purchased is much higher than 8 grand. For each additional house purchased because the credit taxpayers are paying as much as a quarter of the entire cost of the house.

And now there is a proposal to extend and broaden the credit. Soon it may be “Cash for Everything.”

This sounds crazy, but there are a lot of economists who think more stimulus is necessary. Nobel prize winner Paul Krugman, for example. And Richard Koo, mentioned here last week. They’ve seen what happened in Japan. And they see that the real economy is not recovering as they hoped it would. Now, they warn that America might have a “Lost Decade” if it doesn’t continue to stimulate the economy.

How long must it continue bailing out and stimulating? Until consumers have finished de-leveraging, they say. How long will that take? Maybe another 5 years, by our calculation…maybe much longer.

But wait…the whole problem is too much debt, right?

Yep.

But the only way the government can stimulate is by going further into debt, right?

Yep.

And isn’t the budget deficit already at $1.6 trillion…or 11% of GDP…the most it has been since WWII?

Yep.

Well, then where’s the benefit? Won’t the public sector have to de-leverage too?

Bingo!

How does the public sector deleverage?

Two possible ways – honestly…and dishonestly. It can pay down its debts to a level at which they can be carried even if interest rates go up sharply. They did it after the War Between the States…after WWII…and even during the Clinton years. Believe it or not, when the Congressional Budget Office looked ahead in 2001, it saw a budget SURPLUS for 2008 of more than $600 billion. Surpluses had been coming in for years during the Clinton administration. They thought it would keep going like that. Instead, 2008 saw a DEFICIT of nearly $500 billion.

The higher the debt and deficits go the harder it is to pay them down honestly. Eventually, the feds reach the point of no return…like a guy who’s so deep in debt he can’t possibly work his way out. Then, you get another crisis…either in the form of default…or (hyper) inflation…or both.

Bill Bonner

The Daily Reckoning

A Housing Bust Chronology was originally published in the Daily Reckoning on 26/10/2009.

By Ron Paul

Last week a new bill was introduced in the Senate to audit the Federal Reserve.  Some backers of my bill HR1207 and the existing Senate companion bill S.604 were a little miffed at this, but depending on how you think about it, this new legislation poses no great threat to our efforts.

With the economy in shambles, people are looking for answers – not just because of lost savings on Wall Street, but because of lost houses on Main Street. Because of the many problems we face, the Federal Reserve and its powers over the economy have come under scrutiny.  This translates into a lot of political pressure on Congress.  With all the House Republicans signed on as co-sponsors and over half of the Democrats, HR 1207 has enormous bipartisan support.  It would be disingenuous for Washington not to embrace the principles behind this bill after all the promises for transparency.  How can one credibly argue for more transparency in government in one breath and defend the secrecy of the Federal Reserve in the next?

However, there is still very powerful resistance to the disclosures that HR 1207 would require and efforts to weaken it will continue to pop up before this issue is settled.

The good news is that Washington is responding and the Federal Reserve has become the issue.  Concerned Americans need to keep the pressure on by continuing to define what we want, and what we do not want.

One major concern is that HR 1207 constitutes some kind of power grab for Congress.  Congress would not do a better job dictating interest rates or managing money supply growth than the Federal Reserve does for exactly the same reasons: Congress is not the free market.  Any select group of people, no matter how wise and educated, simply cannot replace the wisdom of the market.  HR 1207 does not seek to replace the wisdom of the Fed with the wisdom of Congress.  That would be a giant step backwards.  HR 1207 simply asks for full disclosure, and I am agreeable to allowing for a reasonable lag time to calm the fears that Congress intends to dictate monetary policy.

What we do want, what we insist upon, is that no longer will decisions that carry so much economic weight be made in  absolute secrecy.  We want to know what arrangements the Fed makes with other governments and central banks.  We want to know who is benefitting from the actions of the Fed and what deals are being made.  The Fed is already reacting to pressure by scaling back its liquidity facilities and returning to more traditional monetary policy through direct asset purchases.  With nearly $800 billion in mortgage-backed securities on its books already, $800 billion in Treasury securities, and no real limit to what the Fed can acquire, there is a tremendous opportunity for malfeasance.  We need to know who the Fed deals with, what they buy, how much they spend, and who benefits.  As good as any step towards Federal Reserve transparency is, anything less than full disclosure at this point is unacceptable.

Anything Less Than Full Disclosure is Unacceptable was originally published in Ron Paul’s Texas Straight Talk on 26/10/2009.