How can Peter Schiff see simultaneous hyperinflation and high unemployment?

To pick up a brilliant point made by Peter Schiff in the video to the previous post below (but not understood by those on the brain-dead panel):

Inflation is simply debasement of the currency, or increases in the money supply.  Inflation is occurring, just not where you expect it.  It’s occurring in govt pork and govt employee numbers and in govt contractors making big bucks off govt spending.

Banks are lending massive amounts of new money – to governments around the world.  They are the only entities the banks can find who will pay them back (even if it has to be in worthless paper currency – ha ha ha!).

Therefore, the “de”-flation that we should have seen occur to “cure” the credit bubble has been deferred – by way of an increase in brain-dead govt employees! 

This is unlikely to “cover” for the loss in private sector activity because govt spending is generally unsustainable and therefore has a lower “velocity of money” than genuine private sector investment.  However, these ridiculous “heroin stimulus packages” do cover up (temporarily and only to some degree) the deflation we should have had, coming out of the “credit boom” years.

Because of the massive distortions and misallocations caused by (1) the classic ABCT credit-fuelled Ponzi-boom and (2) now the ridiculous unsustainable govt spending, crowding out the private sector’s access to cheap capital for real sustainable projects that the public actually wants, we are now going to get (at the end of the day) much higher unemployment. 

Higher unemployment is baked into the cake because of the massive stimulus spending.  Take any specific “stimulus” measure, be it “Cash for Clunkers” in the US or the “First Home Buyer’s Grant” or incentives for home insulation or solar panels.  Now, simply ask yourself:

What happens when the “stimulus spending” stops? 

Most of the “stimulus spending” simply brings forward future consumption patterns - it re-allocates inter-temporal spending patterns, but doesn’t actually increase the total consumption over time.

I explained all of this in much more detail several months ago here.  I see the balance of the forces being slight deflation rather than hyperinflation, but the dynamics are the same.  I see possible inflation (possible hyperinflation) in 2012-2015, but that’s a long way off – and I mightn’t even be alive then (here’s hoping!).

Only Austrians such as the brilliant Peter Schiff understand that you can have very high inflation and very high unemployment because of preceding bad investments and unsustainable economic activity, leading to an economic dead-end rather than to ongoing economic activity.

When you build on Ponzi-quicksands, you fall into Ponzi-quicksands.

Silver: The Bargain of the Century!

Let me add an addendum to my Trade of the Decade: 

Silver, the longtime poor cousin to gold, is $et to $oar!

There are so many industrial applications for silver it’s not funny.  They are growing by the day, especially in nano-tech.

The shorting of silver by the bullion banks is insane and unprecedented.

The historical gold:silver ratio over the last 700 odd years appears to be around 30:1.  Some say it’s as low as 16:1.  It’s currently around 70:1.

Wow.

Admittedly, the Makian Distribution predicts massive volatility in commodity prices with increased leverage/debt, and that’s exactly what we’ve had in the silver market over the last 50 years.

But something tells me silver is due to switch across to the right hand side of the bifurcating normal distribution very, very soon.

I would love to see a short squeeze in the silver market.  It would be like watching fireworks on New Year’s Eve.

Charles Goyette proves I am not insane

I’m not as alone as I thought!

As you begin to appreciate the gravity of the situation Charles lays out in a most eerie fashion what the most likely scenario awaits us and builds a strong case for why he believes the dollar will collapse. At this point most readers not familiar with economics or America’s history of debt may begin to panic and pass out from fear, as Charles’ arguments are extremely convincing. From a long term perspective there is very little to argue about, our fiat pyramid of debt has to and will eventually collapse – the only question is of timing. This question is crucial to properly answer as it will spell out the direction of the next several years. While Charles attempts to answer the question with an open mind, his views can be best described as inflationist and he firmly believes that the forces in charge of our destiny will turn to the only tool available to them - currency depreciation.   Once again, in the long run this may be true, but for the time being America finds itself in a unique situation where our dollar is still the reserve currency and is still trusted around the world. Certain technical reasons also suggest that the dollar may strengthen in the coming months not so much due to any internal policy, but the systemic failures in other parts of the world. Still, as Charles poignantly argues our status as the reserve currency is on borrowed time and can change with a blink of an eye.  For this reason the book’s last section presents advice valuable for every American regardless of what one’s prognostication may be.

Charles is partial to value, a concept easy to grasp when you realize just how worthless the dollar can become. Therefore common sense approaches involving gold, silver and oil are presented. Charles makes a deliberate effort to provide options for any would be investor regardless of experience and if you are under the impression that you must build a ten ton safe and start hoarding gold ingots then you are mistaken, it is easier than you could ever imagine.  Several sections are also devoted to address other popular investment strategies like equities and treasuries and why you should think twice before you invest in these increasingly risky asset pools. A rather amusing analogy between America’s credit strength and a shady uncle constantly looking to borrow should be reprinted and distributed all over the Internet.

The Dollar Meltdown is a unique and valuable book, offering the complexities of economics in order to explain where we are and how we got here while presenting investment strategies for those people interested in taking control of their financial feature.  If you prefer eating glass over reading economic text or think Wall St. is a prerequisite before making investments, then this book is a must read for you and your family.

Is the American economic model a sustainable Ponzi scheme?

“Trader Mark” poses this interesting question:  Is America a Ponzi scheme that works? 

To quote from the article:

America is a uniquely attractive place to live: a lifestyle superpower. But it cannot afford to be complacent, for three reasons.

First, other places, such as Australia, Canada and parts of Western Europe, have started to compete for footloose talent.

Second, rising powers such as India and China are hanging on to more of their home-grown brains. There is even a sizeable reverse brain drain, as people of Indian or Chinese origin return to their homes. But neither India nor China attracts many completely foreign migrants who wish to “become” Indian or Chinese.  

Third, since September 11th 2001 the American immigration process has become more security-conscious, which is to say, slower and more humiliating. Even applicants with jobs lined up can wait years for their papers. Many grow discouraged and either stay at home or try their luck somewhere less fortress-like.

The stakes are high. Immigration keeps America young, strong and growing. “The populations of Europe, Russia and Japan are declining, and those of China and India are levelling off. The United States alone among great powers will be increasing its share of world population over time,” predicts Michael Lind of the New America Foundation, a think-tank.

By 2050, there could be 500m Americans; by 2100, a billion. (I am not sure how Earth would support 500M or 1 billion Americans consider 300M use 25% of all it’s resources!) That means America could remain the pre-eminent nation for longer than many people expect.

My take on this article: The question is not whether a Ponzi scheme can work (all Ponzi schemes that get off the ground work to some degree).  The essential questions are (1) can a Ponzi scheme work indefinitely (answer: no, no Ponzi scheme has ever worked indefinitely) and (2) has the U.S. Ponzi scheme just irreversibly burst (answer: yes, immigration levels are falling dramatically if you count illegals and, incredibly, net repatriations of money to Mexican relatives have in many cases reversed - poor Mexican relatives are now in many cases giving money back to newly homeless Mexican families living in the US!).

Once a Ponzi scheme bursts, you cannot ever put it back together because the suckers have dried up and are unwilling to finance the earlier entrants. The latter entrants always have to subsidise the earlier entrants.  Once there are no more “latters” the whole thing blows up. 

The U.S. is simply running out of “latters”.  It’s over, in my view.

The new Ponzi schemes will continue in places like Cambodia, Vietnam and (perhaps) Australia and New Zealand.  Until environmental and population problems mean the “latters” again have to go elsewhere.

But the U.S. in my view has just run out of suckers.  The price for entry into the scheme is too high and the rewards too low.  Everyone sees the Ponzi scheme is a fraud and once that’s exposed it’s all over for any Ponzi scheme.  The illusion is shattered – and once the love’s lost, there ain’t no goin’ back.

Times top editorial cartoon of 2009

Who am I to argue with the venerable Old Lady of old media?

When is the market for US bonds not a market?

When the love for U.S. debt is faked.

Why isn’t Steve Keen an Austrian?

Fantastic Steve Keen interview with Max Keiser below:

I’m genuinely puzzled by Steve Keen.  He correctly, brilliantly, diagnoses the problem – unsustainable growth of Ponzi debt finance that has grown like a cancer in every corrupt-at-the-top Western economy.  He correctly, brilliantly, identifies this Ponzi-finance system as the antithesis of true capitalism.  He correctly, brilliantly predicts that Japanese-style resuscitation efforts will only result in Zombie banks, Zombie companies, Zombie governments and a Zombie economy.  He correctly, brilliantly points out that politicians like Obama have been duped by corrupt advisors into thinking that giving trillions of e-dollars to the bankers will somehow kickstart the economy (it won’t do anything other than save these Ponzi-schemers’ own corrupt skins). 

If Steve Keen so clearly sees government as part of the problem, as a cesspool for rent-seeking behaviour, why doesn’t he grasp the only real solution – less government, less corruption, real competition in money – a return to gold and silver as money? Why isn’t he a follower of Murray Rothbard rather than (indirectly) that corrupt confused dandy, that semi-fascist Nazi-sympathiser, J.M. Keynes?

I’m sure if Keen had been schooled in Austrian economics at university he would have become a fantastic Austrian economist.

Then again, given I was unemployable as an Austrian at university and couldn’t even consider pursuing a PhD in the field (given the politics involved), perhaps he did the sensible thing and perhaps he is a closet Austrian on the inside.

So much of what I hear from him is pure Austrianism, pure Peter Schiff, pure Rothbard, I’m sure he’s sympathetic to at least some of ABCT and Austrianism more generally.  Or is it just that you can’t teach an old post-Keynesian dog new tricks?

Steve, tell me I’m right.  Please.

Visualising the deflationary denouement

We already know it’s going to be hyperinflation or deflationary depression.

The Makian Distribution predicts this: unprecedented public and private debt means unprecedented volatility.  The one absolute certainty is that you will no longer get steady 4% returns year-by-year in any asset class.  You will either double your money in a year or be wiped out completely.  Government bonds will have insanely low (even negative) yields – and then suddenly be worthless within weeks.

Now, David Calderwood imagines the deflationary scenario as vividly as anyone has this year.  As a deflationist, I’m visualising something very similar to happen, short of Bennie Boy dropping toilet paper fiat from helicopters – which ironically is unlikely given he speculated he’d do it if he had to.  Once an academic speculates on something so stupid in an academic paper, he’s highly unlikely to follow through in reality.

The only question I have for David Calderwood is the same one I have for Steve Keen: WHEN?

Baiji “fundamentals”

This is going to be an even ”crazier” post than usual, so please keep up with me and just go with the flow for a little while and hopefully things will make sense at the end.

Assume you’re a fan of freshwater dolphin meat.  I know you’re not, but just go with me here.  Assume you’re also an investor.

The “fundamentals” regarding freshwater dolphins from an “investor” perspective are very good.  The baiji on the Yangtze are dying due to their food source (fish) being massively overfished and appalling pollution problems contaminating the Yangtze from China’s industrialisation.  Some have declared that the baiji are “functionally extinct.”

As an investor, it would be wise to try to “invest” in baiji, wouldn’t it?  Supply down, demand either steady or up (on anticipation of limited supply).  Price should be higher.

Two points immediately need to be addressed from this hypothetical.

First, for those who think it’s “distasteful” to even consider valuing dolphins in terms of their meat, I say to you – think it through carefully.  The harsh reality of life is that animals and plants which are useful to humans are “protected” by humans and flourish. 

Those with no value to humans are vulnerable to extinction.

This has been proven time and time again throughout modern history.

I don’t like this either, and I wish the human population would not grow exponentially.  Then again, I wish I was a dictator so I could turn this loser nation of overconsuming mindless debt-drones on to a more sustainable path of development.  In both cases, I’m dreaming. 

We have to deal with reality.

And the reality is that animals that we can eat survive in this crazy world much better than animals that serve us no purpose. 

The absolutist thinking of so-called conservationists drives me crazy.  This kind of “leave alone!” thinking is naive and dangerous and infects so much of the environment movement.  I cannot believe their basic naive stupidity.

The ban on the sale of elephant tusks in my mind is crazy.  Elephants have become less valuable to local communities in Africa.  Elephants “compete” for arable land.  Guess what’s going to happen when you ban the sale of elephant products?  There’s going to be ongoing tension between local communities and international organisations who don’t have to live with the problem (and who coercively scream for a ban on the sale of anything elephant related).  Ultimately, the local communities will have even more of an incentive to kill the elephants and not help sustain the elephant population.  What do you think is going to happen over the long-run? 

Obviously, land will be taken over by local communities in need of food.  Elephants will die due to lack of natural habitat.  They will not have been “killed” literally by a gunshot, so the zealots in the international conservation organisations will be silent.  But the elephants will die just as surely as if they had been killed for their tusks.

Same with whaling.  Why we are so paranoid about Japanese whaling I will never understand.  We overfish, we pollute the waters with oilspills, chemicals, toxic sludge and refuse, we kill the natural habitat of the whales with a massive toxic plastic waste dump in the middle of the Pacific Ocean - and yet we criticise the Japanese for “hunting” the poor whales.  We kill them slowly but just as surely through starvation, through the destruction of their natural habitat, but because that’s one step removed, because it doesn’t involve a direct bullet to the head, somehow everyone is OK with that.  But when the Japanese actually kill a single whale – whoa… that’s barbaric! 

I can’t stand this hypocrisy, this stupidity, the childish incapacity to directly connect up destruction of natural habitat with the death of an animal.  As an animal I’d prefer the quick and relatively painless death of a bullet to the head (safe in the knowledge that some of my family would survive and possibly even by protected by my killers) rather than a slow and excruciating and depressing death by starvation and destruction of my whole natural habitat, grieving knowing my children will slowly but surely starve to death, perhaps be forced to eat toxic plastic… knowing that none of us will survive. 

Which would you prefer, if there was no other choice?  And don’t say there’s a third choice.  There isn’t. 

Unless humans agree TODAY to stop all human reproduction and start consuming less, there is no third option.

Given this sad reality, I have another invariable rule for environmentalists to consider:  Once an animal is valued by man, it is protected by man.

Sheep outnumber New Zealanders for a reason – sheep are valuable.  New Zealanders take care (good care) of their sheep. 

Kiwi birds can’t be eaten.  They have no direct intrinsic value.  They are difficult to spot in their natural habitat so they are not even valuable from a tourist perspective.  Guess what – they are dying and are nearly extinct.

So discussing dolphin meat for me is perfectly reasonable.  Ironically, if freshwater dolphin meat was more valuable perhaps the baiji would not be functionally extinct today.

But this is not even the main point of this post.

Let’s continue with this thought experiment. 

In a superficial sense, you would think as a naive investor (supply down, demand up) that somehow “getting into” freshwater dolphins would be a good idea.  BUT THE WHOLE HABITAT OF THE DOLPHIN IS BEING WIPED OUT.  This is not a matter of being able to “invest” in dolphins.  What we are witnessing in the case of the baiji, I’m sure you would agree, is inevitable extinction.

Similarly, Jim Rogers consistently states that the “fundamentals” for agriculture are incredibly positive.  He states that investors should get into agriculture.  Supply is down.  Demand (with population growth and rising Asian incomes) will inevitably go up.

Although I respect Jim Rogers as an investor, this shows his limited thinking, his inability to see the full implications of the trends here.  He has spent his whole life as a commercial trader and investor, not as a social scientist or economist or philosopher.  He sees the problem, thinks in terms of supply and demand and then concludes that investment in agriculture is a good idea.

I beg to differ.  Although I respect Jim Rogers as an investor, I don’t respect him as a deep thinker.

My view is that we are watching EXACTLY THE SAME PROCESS AS THE EXTINCTION OF THE FRESHWATER DOLPHIN, APPLIED TO HUMANS!

Overfarming cannot be reversed.  Topsoil is irreplaceable.  Phosphates, once lost, cannot be replaced if there is no supply.  The water table once polluted cannot ever be cleansed of chemical toxins.  Destruction of arable land is in most cases irreversible.

The price mechanism cannot transform houses into farmland, cities into arable land.  Once destroyed these things (vital for our very survival) cannot ever be put back in place. 

Similarly, once the freshwater dolphin is extinct no amount of hedge fund investment is going to get its natural habitat back.

So Jim Rogers is right to see the trend, but he hasn’t worked out the full implications. 

WE ARE ACTUALLY WATCHING THE DESTRUCTION OF OUR OWN FOOD SOURCE.  WE ARE WITNESSING BEFORE OUR VERY EYES THE DESTRUCTION OF OUR OWN HABITAT.  WE ARE INEXORABLY CAUSING OUR OWN EXTINCTION.

If you think I’m crazy, please read this article and this previous post and then tell me you’re 100% confident that governments and investors will get us through this little problem.

Sometimes the price mechanism has become so corrupted by bankers and governments that the warning bells don’t go off until it’s too late. 

I don’t believe we are watching a “bull market” in agriculture.

What we are watching is the massive extinction of our various food sources, resulting in a massive food crisis for the (much higher!) human population in a few short decades.

No amount of hedge fund money will turn Asian cities back to rice paddies, Western suburbs back into farmland, or polluted toxic African mining towns back to unspoilt Savannah.

It’s already too late, in my view.  The trends are “locked in”. 

We are the next freshwater dolphin.   We are killing ourselves.  Climate change, if it exists, will simply accelerate this process.

Those institutions supposedly designed to “forward plan” us out of this mess also happen to have control of the guns.  History records that when a crisis hits, governments turn from protector to predator, plundering the people for food.  Chile.  Zimbabwe.  Cambodia.  Talk to indigenous peoples in Australia, in New Zealand, in Hawaii, in North America, in South America, in Asia, in Africa about what elite governments do to those they supposedly have a duty to protect.

Sorry, that’s right. You can’t.

Because they’re already dead.

Jim Willie (a.k.a. The Golden Jackass) nails it

Fantastic blockbuster post, predicting multiple, cascading sovereign debt defaults, a run on US debt and a final run to gold and silver.

I agree with all of this analysis, as can be seen in previous posts on gold, silver, fiscal Armageddon and other entries.

This is the best current synopsis on what’s coming that I’ve seen to date.  The question is timing.  I cannot say this will happen in 2010.  But it will happen.

The only question is when.

One year to go, Germany

On 3 October, 2010, Germany will make its final payment on its WWI debts, imposed on it by the Allied Powers via the illegitimate, coercively imposed Treaty of Versailles, which precipitated the Weimar Republic’s hyperinflation, which wiped out the German middle class and precipitated WWII.

Can you believe that through all of this, the debt was still enforced, payments still honoured, and interest paid on the debt for nearly a century?

Oh, the humanity!

Robert P. Murphy votes hyperinflation

Murphy sees destruction of the currency and a new Amero emerging from the wreckage.

MISH, the Rothschilds, Steve Keen (and I) vote deflation.

Someone’s gonna be wrong.

Fortunately gold and silver are the answer in either case.

Debt addiction

is the most difficult and insidious addiction to break, because it involves lengthening a shortened time horizon.

Once shortened, it’s impossible to go back.

Free competition in currency

A man can dream…

All fall down…

From Jim Sinclair’s Mineset:

Frank Shostak blockbuster

Austrian economist Frank Shostak predicts further “paralysis” ahead and thinks all the stimulus spending will just make things worse.  And he backs up his predictions with a detailed, superb analysis of savings and money flows.

Great in-depth analysis of the current economic environment for anyone interested in the Austrian School.

I prefer to keep in mind the Five Golden Rules of the “Ponzi-economy”: 

(1) The more stimulus spending by govt (funded from coercive taxes), the more malinvestments. 

(2) The lower the actual reserve ratios for banks, the more likely a liquidity crisis is imminent when the ratio has to increase.

(3) The more govts and banks try to maintain unrealistic asset prices NOW, the more stagnation in the economy. 

(4) High CURRENT asset prices mean lower FUTURE profits for investors and therefore lower CURRENT borrowing, investment and economic opportunity.  Conversely, low CURRENT asset prices mean higher FUTURE profits for investors and therefore higher CURRENT borrowing, investment and economic opportunity.

Therefore, govts that delay foreclosures, bail out banks, “save” employment in certain hand-picked industries are simply incubating zombies.

(5) There is no solution at the end of a major economic bubble other than letting deflation occur and some banks go bust.  The “false” “bubble activities” should never have existed.  Keeping them alive only delays and exacerbates the inevitable corrections that must occur anyway.

BIS rediscovers century old ABCT

Ludwig von Mises’ Theory of Money and Credit was published in 1912.

Nearly a century on, the Swiss Bank Mafioso rediscover Austrian Business Cycle Theory. 

Amazing.

Hmmmm….

An interesting piece pouring scorn on the “recycling” fetishists.

I don’t know whether this is the best application of Austrian analysis to a problem for the following reasons:

1. As Michael Rowbotham points out, the current monetary system pushes us towards debt-based overconsumption.  Gold would reverse this process and reward savings to a much greater degree.  So the real concern is that the whole monetary system is pushing us towards unsustainable overconsumption – something both Mises and Rothbard would have seen had they been alive.  Their PRINCIPAL concern was the monetary system skewing incentives and creating malinvestments.  This is what Austrians should be worrying about.  Not trashing recycling.

2.  Perhaps I’m a soft Austrian, but there are externalities which are not “endogenised” in the price system currently.  The full long-term polluting effects of oil production, of cyanide-based and mercury-based gold production, of coal mining… all of these have externalities in the form of pollution of river systems and the air which are not captured by the price system because no one owns these rights.  So I do believe we may not be appropriately pricing inputs for the long-term, which means that recycling may make more sense than this “Austrian” believes.

It’s funny that in the old days when there was more stable money, there was actually more recycling.  I still remember glass bottles of milk being picked up in country towns in Australia each day for recycling.  I still remember aluminium cans being collected for their recycling value.  I still remember “stuff” being re-used all over the house by my grandmother.  What’s changed?  The cost of these “throw away” items relative to our income has gone down, but the cost of housing relative to our income has gone up.  Massively.  So we worry about our mortgages and our jobs – but not about our savings or the milk bottles.

Return to gold and yet another problem would be addressed – that of pointless debt-based over-consumption.  The cost of housing relative to our income would go down.  The cost of “throw away” items relative our income would go up.  And so we’d throw away less.

QED.

Private debt “has now reached levels that are simply unprecedented in human history.”

Steve Keen calls a second GFC due to private debt levels that have “now reached levels that are simply unprecedented in human history.”

I agree.

But when?

Japan tries “deflation buster”

Japan is throwing toilet paper at decades of malinvestment. 

Ha Ha Ha!

That’s like throwing toilet paper at a receding tide, expecting the tide to stop receding.

And it’s curious that Japan is still fighting M3 deflation if the govt is in total control of M1.  Further evidence that Gary North is wrong?