Archive for December, 2009

Times top editorial cartoon of 2009

December 27, 2009 Leave a comment

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

When is the market for US bonds not a market?

December 27, 2009 Leave a comment

The imminent global food crisis

December 26, 2009 Leave a comment

Please remember when you read articles like this, that you heard about this first here, and on WP about three years ago.

Why does everyone (including my wife) think I’m mad?  It must be the flouride in the water supply poisoning their brains. 

There’s gonna be a bull market in canned food and farmland and guns and oil.  For the rest of your natural life.

$10,000 gold

December 26, 2009 Leave a comment

It’s possible.  Here’s why (from Porter Stansberry):

It’s one of those numbers that’s so unbelievable you have to actually think about it for a while…

Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that’s not counting any additional deficit spending, which is estimated to be around $1.5 trillion.

Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That’s an amount equal to nearly 30% of our entire GDP. And we’re the world’s biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then “rolling over” the loans when they come due. As they say on Wall Street, “a rolling debt collects no moss.”

What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt… at ever shorter durations… at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that’s when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt, it’s called a “default.” Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. The formula is called the Greenspan-Guidotti rule.

The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world’s largest money-management firm, PIMCO, explains the rule this way: “The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support.”

The principle behind the rule is simple. If you can’t pay off all of your foreign debts in the next 12 months, you’re a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It’s a guaranteed default.

The U.S. holds gold, oil, and foreign currency in reserve. It has 8,133.5 metric tonnes of gold (it is the world’s largest holder). At current dollar values, it’s worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that’s roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether… that’s around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we’ve been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So… where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we’re still going to come up nearly $3 trillion short. That’s an annual funding requirement equal to roughly 40% of GDP.

Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they’re not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None owns even 1% of its total reserves in gold.

I examined these issues in much greater detail in the most recent issue of my newsletter, Porter Stansberry’s Investment Advisory. Coincidentally, the New York Times repeated my warnings – nearly word for word – a few weeks ago. They didn’t mention Greenspan-Guidotti, however… It’s a real secret of international speculators.

My readers know that Greenspan-Guidotti means the U.S. is likely to have a severe currency crisis within the next two years. How high will gold go during this crisis? Nobody can say for sure. We’ve never been in the situation we are now. The numbers have never been so large and dangerous. But I wouldn’t be surprised at all to see gold at $10,000 an ounce by 2012. Make sure you own some.

Categories: Gold, Investment tips

Gold wins gold: Best asset to hold this decade

December 26, 2009 1 comment

One picture truly can tell a thousand words:

Merry Christmas and Happy New Year

December 23, 2009 Leave a comment

To those readers who have tolerated my rage against the machine, thanks for sticking with me.

As the Buddha stated just before his death, “Everything is Change” – so I am quietly confident things will get better in 2010 (they could hardly get worse).

I leave you with Lew Rockwell’s sage words regarding God’s money and the connection between faith, truth and sound money: 

Fiat money with central banking… tempts corrupt politicians and bureaucrats, and it also further corrupts them. It is the great occasion of sin of our public life. The tragedy is that their use of the printing press not only corrupts them; it imposes dreadful and intolerable costs on the rest of society, in the form of price inflation and business cycles.

We’ve seen the corruption grow worse over time. We are living now in the 37th year of fully fiat money with central banking. The politicians of the past were a bit reticent to use all the power they had. They are becoming ever more brazen. The sense of shame seems to be gone forever, their consciousness completely papered over by the ominous power they possess. The pundit class is following them, believing that there are no limits.

In truth, all these bills must be paid. To realize that is to realize the necessity of radical reform. It can be overwhelming to contemplate the glorious results of a full gold standard reform. Inflation would stop eating away our purchasing power. The business cycle would be tamed. International trade would not be disrupted by wild swings in currency values. But of all the benefits, this one is the greatest: it would stop arbitrary rule, dead in its tracks. It would force the government to curb its ways. It would shore up our freedoms.

For this reason, the policy of sound money is very much linked with morality. The Hebrew scriptures, in the nineteenth chapter of the book of Leviticus, warns “you shall have just balances, just weights…” The twenty-fifth chapter of Deuteronomy issues a similar warning: “You shall not have in your bag differing weights, a large and a small.” Proverbs says the same: “A false balance is abomination to the LORD: but a just weight is his delight.” Another passage says: “Diverse weights, and diverse measures, both of them are alike abomination to the LORD.”

All of these relate in some degree to the need for sound money and condemn the act of fraud and monetary debasement. The consequences of monetary sin cannot be contained to the sinners only. They are spread out all over the whole of society, destroying its economic basis and corrupting the morals of society. They foster crazed illusions that we can magically generate wealth through the act of printing money, and the attempt to do so has catastrophic consequences. As Mises wrote: “Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.”

I find it sickening that there are so few voices outside the Austrian School that will stand up to this policy. And I fear that the consequences of this policy will be felt for many decades into the future. There is still time to reverse course. There is nothing inevitable about despotism. We are not being forced down this road. We can embrace freedom. If we understand that freedom is inseparable from sound money, we can embrace that too. Until then, we will continue to place our trust in the political establishment to do what is right. Call me a gold bug if you will, but I trust hard money far more than our rulers. And that, ultimately, is the choice we must make.

Merry Christmas and Happy New Year.  Let us pray for sound money to return in our lifetimes.

The UK is killing itself on bad ideas

December 22, 2009 1 comment

You’d think mainstream economists and commentators in the UK would reflect on the fact that output has declined 6% during this recession, the worst since the 1950s (possibly the 1930s), on the fact that financial deregulation only a few short years ago may just have something to do with the current recession, on the fact that the Japanese experience proves low interest rates and massive government spending does nothing other than the delay the necessary adjustments the economy needs to get back on track, on the fact that Keynes was an intellectual lightweight whose ideas have wrought destruction in every country (the UK, the US, Japan) where they have been tried.

But no, this piece by Keynesian disciple Robert Skidelsky in proves the British establishment learns nothing, and are willing to walk off a cliff rather than admit they are dumber than the local storekeeper when it comes to economics.

Check out this gem:

Even the normally sober Martin Wolf has fallen for this line (FT, December 16 2009). The pre-crisis UK economy, he says, was a “bubble economy”. The bubble made UK output seem larger than it actually was! This is old-fashioned Puritanism: the boom was the illusion, the slump is the return of reality. However, experience of past recessions suggests that, once the corner is turned, output recovers vigorously from slump conditions (as do prices). Between 1933 and 1937 the UK economy expanded by 4 per cent a year, much higher than its “trend” rate of growth. Yet in 1931 orthodox economists were denying there was an output gap at the bottom of the greatest depression in history. 

Based on the wholly fallacious idea that financial deregulation had nothing to do with a false boom (and therefore a bust), Skidelsky looks around, sees the “mad” years of 2000-2007 as “normal” and the adjustment phase after the credit-fuelled boom as the “aberration” and wants to return to normality.

A simple look at credit growth, debt-to-GDP ratios, personal debt levels, and the growth in housing prices and mortgage debt would all irrefutably prove that the UK went through an unprecedented credit-fuelled boom which was completely unsustainable. 2000-2007 was the aberration. 2008-? is the long painful adjustment period, made worse by Skidelsky’s admonitions to return to madness.

Fortunately, the private economy is having none of this, is rapidly reducing its debt levels to stave off mass insolvency, and is leveraging down. 

Skidelsky hilariously characterises this necessary de-leveraging as irrational “money hoarding”:

In a slump there is no natural tendency for the rate of interest to fall, because people’s desire to hoard money is increasing. So printing enough money to “satisfy the hoarder” is the only way of getting interest rates or the exchange-rate down. 

Err…no.  In a slump, there are fewer speculative opportunities and therefore people stop borrowing.  They sensibly save their money, recognising that borrowing in this environment would be madness.  This “increases” savings (“hoarding” in Skidelsky’s derogatory term), reduces factor prices and eventually allows borrowing to be resumed for profitable activities.

To quote Rothbard (pp. 40-41): 

In their stress on the liquidity trap as a potent factor in aggravating depression and perpetuating unemployment, the Keynesians make much fuss over the alleged fact that people, in a financial crisis, hoard money instead of purchasing bonds and contributing toward lower rates. It is this “speculative hoard” that constitutes the “liquidity trap,” and is supposed to indicate the relation between liquidity preference and the interest rate. But the Keynesians are here misled by their superficial treatment of the interest rate as simply the price of loan contracts. The crucial interest rate, as we have indicated, is the natural rate—the “profit spread” on the market. Since loans are simply a form of investment, the rate on loans is but a pale reflection of the natural rate. What, then, does an expectation of rising interest rates really mean? It means that people expect increases in the rate of net return on the market, via wages and other producers’ goods prices falling faster than do consumer goods’ prices. But this needs no labyrinthine explanation; investors expect falling wages and other factor prices, and they are therefore holding off investing in factors until the fall occurs… Far from “speculative” hoarding being a bogy of depression, therefore, it is actually a welcome stimulant to more rapid recovery. 

For a simpler explanation of the Austrian analysis, look at my five rules for the Ponzi-economy here.

This piece proves beyond a reasonable doubt that some members of the British establishment are literally insane, and are leading the British economy over a cliff.  Why is it that no Keynesian zealot can ever swerve out of the way of an economic obstacle?  They must all be zealot-zombies