Archive for the ‘Central banking’ Category

Why fiat paper money is always trashed in the end

January 7, 2010 2 comments

Because govts can.  So they will.

Which is why gold and silver are God’s money, real money, honest money, money to have in a crisis like today, money to hold in your own hands secure in the knowledge no embezzling shyster is going to take it away from you or counterfeit it or overprint it.

As Jeff Clark explains here:

Bottom line: after all the bailout programs, housing initiatives, rescue efforts, stimulus schemes, bank takeovers, wars, unemployment benefit extensions, and numerous other promises, the biggest financial deception of the decade is what the U.S. government is doing to the dollar. Nothing else even comes close.

This reckless activity has spooked our foreign creditors, weakened our global standing, diluted our currency, is punishing savers and retirees, and ultimately sets us up for a level of inflation this country has never seen before.

Yet, what is the guardian of our economy and money telling us now?

“Will the Federal Reserve’s actions to combat the crisis lead to higher inflation down the road? The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so. In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here.” (Ben Bernanke, December 7, 2009).

This is pure rubbish. If inflation could be controlled by just thinking stable inflation thoughts, then Ben should be able to grow a full head of hair by just thinking scalp follicle thoughts. This is so ridiculous, it’s insulting.

Government actions make a mockery of their words; what they say and what they do are diametrically opposed. It’s clear that inflation is not a question of if, but when.

Any level-headed individual has to conclude that there will be a steady – and likely accelerating – decline in the dollar’s purchasing power. It’s inevitable.

The great masses don’t quite understand it yet, but they will. There will be no escape from the cold, hard slap in the face citizens will receive when a high level of inflation arrives. And when it does, it will make a mockery of any opposing viewpoint.

So the question before you is simple: Will you be a prepared survivor for what lies ahead, despite what our government leaders tell us, or will you be a complacent victim of the biggest financial deception of the decade?

For me, there’s only one solution. Don’t kid yourself into thinking a man-made asset will protect your purchasing power. This is the time to be overweight gold and silver. I advise letting them serve their purpose for you.

I don’t like the term “man made”.  Everything is man made, and valued by man.  I prefer this expression: “Don’t kid yourself into thinking an easily debased paper asset will protect your purchasing power.”

Because in the end, it never has.  Ever.  In the history of paper currencies every single one has eventually ended up worthless.  Every.  Single.  One.

Think about it.


Who should take a bullet over the GFC?

January 4, 2010 Leave a comment

According to Edmund Conway of the UK Telegraph, the blame should be spread around.

That’s BS.

The blame clearly and undeniably lies at the door of the Pricks of Threadneedle Street. 

Here’s Conway’s attempt to channel the bankers’ mea culpa:

Who is really to blame for the financial and economic crisis? The answer is as frustrating as it is obvious: everyone and no one. In some sense all the members of both the public and City practitioners must take some responsibility for the worst slump since the Great Depression. Whether it is the bankers, the finance ministers, the hedge fund managers, the regulators or the members of the public who borrowed too much, we are all to a greater or lesser degree culpable for the crisis. In the broadest sense of all, human nature is to blame – whether it is the irrationality that tends to cause and magnify business cycles or our inability to challenge the status quo.

But without doubt some are more guilty than others. As far as some are concerned, the fault lies most specifically with the financial system and the bankers who created the toxic debt instruments, and, furthermore, lined their own pockets with the proceeds.

However, in what may in time be judged as a seminal contribution to the debate, the Institute of Economic Affairs has now published one of the most detailed analyses on the causes of the crunch, and their powerful conclusion is the opposite: that it was governments and regulators who erred. Moreover, that the people most often berated for their part in the crisis – the hedge fund managers and those who run tax havens – are among the least guilty. Meanwhile, the regulators have secured a massive reward for failure, in the form of more funding and new responsibilities.

A letter to The Daily Telegraph, signed by some of the country’s most renowned economists, outlines precisely what went wrong and spells out the need for a radical overhaul to ensure it never happens again:

“Perhaps the most important point: central banks should have done more to ensure both prices and debt did not balloon out of control. In the early years of this millennium, following the dotcom bubble, central bankers ought to have kept interest rates higher. Likewise, those in surplus nations should have tried to encourage their public to save slightly less. Instead, the cabal of central bankers, led intellectually by Federal Reserve chief Alan Greenspan, ignored the massive imbalances that built up between nations and the asset bubbles inflating closer to home, judging that they could easily mop up after their explosion.

“The Bank of England and Financial Services Authority are to blame here: there are a whole variety of counter-cyclical policies they could have used – for instance compelling banks to keep more liquid cash or to build up more capital – but they refused to do so. Whatever they claim now about overhauling the system, the fact is that they had powers to do so before, but simply did not act.

“The IEA argument is that the shadow institutions – the hedge funds, private equity and tax havens – are becoming the scapegoats for the crisis. But in fact the real problems were to be found in the big banks and insurers, which were tightly overseen by national authorities. Much as we may disapprove of these other cogs in the financial system, it is unfair to blame them for the crisis.

“This proposal, together with the second, that banks should be allowed to fail, are among the more controversial propounded by the IEA. Their idea is to call for a more free banking system, in which customers are aware that banks are not always supported, and that in the event of a bank’s failure depositors will become creditors whose cash is not guaranteed.”

“One lesson from the crisis is that central banks must make sure they do not focus on one thing. Had the Bank of England paid more attention to the growth of money, it might have done more to prevent the debt bubble expanding. That said, the European Central Bank, which has a more explicit monetary focus than the Bank, has also been found lacking in its approach to monetary policy.”

Why do the Brits go to water when they try to point out the venality of mafioso bankers, or the idiocy of government, or the brainlessness of those who happen to be in power for no other reason other than their surname or their kindergarten education?  What is it about the “born to rule” class structure that strangles commentators when they need to identify those who were to blame for the biggest catastrophe the Brits have seen since the Great Depression?

I would prefer it if the economists would say: “One lesson from the crisis is that central banks have proven themselves to be the very definition of a moral hazard.  Central banks should be simultaneously killed off in a mass orgy of public humiliation and ridicule (preferably in the middle of a town square, like the old days). Banks should then be broken up and allowed to fail like any other business.  For depositors, the warning should be ‘caveat emptor’.  And for bankers, the warning should be ‘Jail for Fraud, like any other common crook.'”

Keynesian claptrap

January 4, 2010 Leave a comment

When a policy is tried again and again and doesn’t work, if you keep trying it, you’re madVerifiably insane.

Our politicians in the UK, the US and Australia are all verifiably insane.

Example 142,426,273 in the long, sorry tale of governments trying to “do something” to fix problems they themselves created, is fiscal deficit spending to “cure” a slump caused by too much credit creation (itself caused by the govt’s support of central banking).

The solution to most government-generated economic “problems” is for the government to shrink, to get out of the damn way, to stop interfering, to stop meddling, to stop creating uncertainty in the business plans of real businessmen and women.  In other words for bureaucrats to shoot themselves in the head.  Of course, that’s the last thing a bureaucrat (or banker) wants to hear, so the madness continues until they really stuff up an economy beyond the point of no return.  Like Japan.  Or the UK.  Ha Ha Ha!

I know it’s old-fashioned to remind the anti-trust regulators, or the cops picking up someone for possessing a few grams of coke or pot, or the central bankers that the real purpose of monopoly government was very limited.  It was to provide (1) defence and (2) security services to allow citizens to protect their property rights and (3) very little else (perhaps provide public goods where they genuinely existed).

Now the government appears to try to do everything BUT these things.

They are allowing our soldiers to be killed in Afghanistan, but laughing at me when I say my wallet was stolen in my own suburb at home.  They tax me so they can give the money to another homeowner for home improvements (since when was it government’s job to decide who should get home insulation?) or they bailout bankers instead of saving bankrupted small businesses and farmers (since when was the government’s role to pick winners in the economy?  Where’s my bailout?).  They steal my guns, my gold (gold coin sales are often suspended for no reason), my income, my livelihood, my right to smoke what I want where I want – and yet they don’t provide regular running water (water restrictions are a regular occurrence around here), they don’t defend me against embezzling bankers and they don’t stop robberies in my local area.  But they think they’re geniuses when it comes to curing an economic slump!

Are these guys delusional?

Sterling T. Terrell writes:

Fiscal policy, the attempt to use government outlays and revenue to better the economy, simply does not work either a priori or in practice.

But just ask any undergraduate student in Macroeconomics 101 about fiscal policy. They know the “correct” answer: If the economy is “too slow,” the government should lower interest rates and increase government spending. If the economy is “overheated,” the government should raise interest rates and decrease government spending.

The horrors of monetary policy aside, fiscal policy cannot stimulate the economy. As we know, the government has no money of its own. It has only the power to tax and spend the money of others. There can only be a transfer that takes place, not a creation of wealth: jobs in X are gained, but jobs in Y are lost.

However, this transfer is actually a loss. Taxing away a person’s ability to fulfill his own wants and then providing him with things he may not care about makes him worse off. This process condescendingly supposes that individuals cannot decide for themselves what they need.

Furthermore, taxing is not done in a uniform manner. Progressive income taxes, double corporate taxes, and estate taxes all disproportionally take from the people that make, create, invest, and speculate to the betterment of all. Henry Hazlitt famously explained this in his well-known work Economics in One Lesson (see chapter five).

The common objection to such a theoretical analysis is: “Well. No. You have to look at the fiscal multiplier. One dollar in government spending, once it filters through the economy, will make GDP increase by more than one dollar.”

Let us agree to play the empirical game, momentarily.

New work done by Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh, covering data from 45 countries from 1960 to 2007, casts doubt on the validity of the multiplier in many cases.

Our findings lead to the usual “it depends” answer to the size of the fiscal multiplier question. As those familiar with macroeconomic theory likely anticipated, the size of the fiscal multipliers critically depends on key characteristics of the economy (closed versus open, predetermined versus flexible exchange rate regimes, high versus low debt) or on the type of aggregate being considered (government consumption versus government investment). Policymakers would therefore be well -served in taking into account a given country’s characteristics in evaluating the benefits of any fiscal stimulus package.

Read the details for yourself, but the differences they found seem to be the largest when comparing fixed- and flexible-exchange-rate economies,

and closed and open economies:

This all suggests that in a country such as the United States the fiscal multiplier is virtually zero. Robert Barrow agrees.

So, in addition to fiscal policy taking away the freedom to choose, robbing X to hand it to Y, and penalizing the very people that improve our lives, it also fails empirically. Even if it did not, as is seemingly the case in certain closed economies graphed above, there would still not be a valid reason to oppress people further by taxing away their money for “stimulation.” By that rationale, a fiscal policy taking up 95% of GDP would make people better off than a fiscal policy taking up 5% of GDP. Clearly, this is not the case.

Earlier this year, Frank Shostak predicted that the recent fiscal stimulus would not help the US economy. Looking at unemployment, he was right.

Fiscal policy does not work, a priori or empirically, but the Austrians already knew that.

Has the Fed stopped buying long-dated Treasuries?

January 4, 2010 Leave a comment

For those in the know, this is not a good-looking chart:

Hello higher interest rates in 2010!

Steve Keen’s predictions for 2010

January 2, 2010 1 comment

Steve Keen (Australia’s top academic economist) takes a look back at 2009 – and squints at 2010 here on his blog.

Although I have the utmost respect for Keen as an economist and as a superb modeller, I can’t help myself.  I have to pick apart some of the comments he makes on his blog.  If I respected him less, I wouldn’t bother. 

I rarely comment on Paul Krugmaniac’s repetitive calls for the govt to spend itself into oblivion because (1) it’s so boringly repetitive and (2) my attention is easily distracted away from a quasi-socialist one-trick pony.

An interesting comparison could perhaps be made between my light-hearted, casual predictions and Keen’s more cautious, sober, somber tone on his blog.  He cares about his professional reputation, his academic legacy and so keeps trying.  I consider the whole “science” of economics a joke, so cannot bring myself to bother.

My predictions are contained here.  I trust even the casual reader can see that I treat both my predictions and economic predictions generally with a grain of salt (or perhaps – more accurately – with the respect I accord any fiat currency, which is to say none).

There are two reasons for this light-hearted disrespect for economic predictions. 

The first comes from the Austrian School insight that mathematical modelling of the ever-evolving market economy is futile and betrays a fundamentally naive view of market participants (that they can be mathematically modelled like rats) and a fundamentally egocentric view of bureaucrats (that they can predict what is inherently incapable of prediction).

Let me give you a few examples in the tradition of von Mises. 

Assume a very well-respected govt bureaucrat modelled the economy and made the “accurate” assessment that gold would double in the next five years.  Once this “prediction” got out into the market and other analysts reached the same conclusion, the price would likely rise quickly now – possibly even double now – because of the mere existence of the prediction.

How, in such a “recursive” modelling environment, do economists still treat modelling seriously? 

George Soros tries (ineffectually) to capture this concept with the term “reflexivity” – but I prefer the Austrian School’s characterisation of the economy as ever-evolving, and therefore not amenable to mathematical modelling at all.

Keynesians (and even Steve Keen) have a tendency to get lost in equations and don’t appreciate or understand the “heterogeneity of capital” – an Austrian concept meaning that investment cannot be combined and agglomerated into a total number.  The most important feature of entrepreneurship is the kind of investments made. 

The country that produces iPhones or eco-friendly resorts in Bhutan has “better” capital investment than the country that produces toxic cancer-causing asbestos or nuclear weapons commissioned by a paranoid central govt – even if the sum “total” of investment is triple in the latter country compared to the former.

Businessmen and investors seem to “get” this intuitively, but economists seem stuck in a rut, worrying pointlessly about numerical GDP and investment totals.  Who cares if we produce more or less nuclear weapons, toxic toys or cut down more rainforest?  It’s all “bad” investment if the price signals stimulating the investment are corrupted by bad govt policy or by corrupt banking practices. 

I tried to provide an insight into this “qualitative” approach here and here.  We are literally killing ourselves on bank and govt stimulated malinvestments.  It’s madness, but until we return to sound money there’s no way we can determine what investments are fundamentally sustainable and sound, and what investments are Ponzi-style speculative, wasteful, unsustainable malinvestments.

I’m much more concerned (terrified?) of the malinvestments, the qualitative “mistakes” that govts and fractional reserve banking stimulate and encourage, than the quantitative outcomes of these malinvestments.

Curiously Steve Keen recognises – even rails against – this clear monetary corruption, this insidious, incestuous link between govt and bankers, but doesn’t give up on his attempts to model the economy – despite this corruption.

I gave up years ago on modelling when I realised the markets were completely rigged.  This was proven in 2009. 

Keen recognises that the “logical” outcome for house prices in Australia in 2009 should have been a decline and identifies the corrupt govt’s manipulative and unsustainable doubling of the FHBG as the cause of the remarkable resilience in house prices – but doesn’t conclude that economic prediction is a complete waste of time in this corrupt environment, but rather tries again by analysing stockmarket trends from the Great Depression!

A few hypotheticals for Steve Keen to consider:

(1) If Helicopter Ben gave every single American $5 million in 2010, would Keen’s predictions still have validity? Answer – no.  I guarantee the stockmarket would not follow the trends set in the Great Depression regardless of American debt levels.  They may follow the German stockmarket trends during the Weimar Republic and face complete monetary collapse – but that’s a different story.

If this doesn’t seem a “reasonable” hypothetical, consider the trillions Ben already gave the bankers in 2008-2009.  By rights, the US bankers on Wall Street should either be in jail or homeless, dancing on the streets for food.  Instead they’re sipping champagne in Zurich and throwing wild parties in New York.

So much for “economic” modelling of bank profitability!

(2) If Robot Rudd gave every Australian family $1 million for home upgrades or renovations, I guarantee house prices would spike up – regardless of the level of mortgage debt in this God-forsaken country.

If this doesn’t seem a “reasonable” hypothetical, consider that the Rudd govt guaranteed every bank depost in Australia in 2008-2009, bought $8 billion in toxic RMBSs that the market wouldn’t touch, doubled the FHBG and gave subsidies to home improvements (insulation etc) in the billions.  If this is not deliberately and cynically distorting the “natural” market dynamics in the housing market, I don’t know what is!

The key issue is to ask:  If the govt tries to fight the natural adjustment process, what malinvestments will result from this distortion?  What will the consequences necessarily be?  It will be to create zombie banks, zombie companies, zombie govt employees, a zombie economy… and lots of useless economic activity that will be unsustainable in the long run.

Understandably, given the tension between his desire to provide accurate, reputation-enhancing predictions and his poor track record in 2009, Keen’s vision isn’t very clear on 2010. 

Curiously, in this particular post, he doesn’t explain why he’s going on a trek from Parliament House to Mt Kosciousko.  For those who don’t know, he lost a bet with Rory Robertson of Macquarie Bank over Australian house prices.  Keen predicted decline.  Robertson didn’t.  Robertson won.

Despite his brilliance as a modeller, he underestimated the madness and corruption of central government.  You can never “endogenise” the stupidity of government, the madness of Treasury, the influence of bankers, the venality of the political process.

Why doesn’t he give up on predictions entirely, admit the govt is corrupt and an agency of the big banks and state that he will return to making predictions once the govt turns away from corrupt, cynical manipulation of the economy?  Probably because he knows that the corrupt, cynical manipulation of the economy never stops – at least until complete Weimar Republic-style chaos ensues (the sooner the better in my view).

When Keen finally gets around to actually reading Rothbard and von Mises, I think he will become a much better economist.  And investor (he sold his house in 2009, and probably regrets the decision). 

I have a tip for Keen – buy farmland and gold and guns. 

Food and real money and protecting your family from predators and parasites never goes out of fashion.

When is the market for US bonds not a market?

December 27, 2009 Leave a comment

Austrians are NOT for financial “deregulation”

December 22, 2009 Leave a comment

I have not met one Australian who understands Austrian economics

99% of economists have no idea about Austrianism.

The five (including Steve Keen) who do know something about it don’t like it.

Some think it’s just another extreme form of “free market” capitalism.

Some think it’s just about returning to an “old” gold standard.

Some think it’s about anarchism.

Some think it’s pro-deregulation everything.

Some (like “Phil” in the Steve Keen post below) link Austrianism with fascism, using one sentence from von Mises’ millions of sentences on human action to “prove” Austrianism is sympathetic to fascism.  Austrianism (despite its name) has nothing whatever to do with 20th century fascism.  Mises had to flee fascist Europe.  Austrianism is more “sympathetic” to libertarianism (and classical liberalism and possibly anarchism in its extreme form) than any other political philosophy.

In attempt to kill off the slander and libel over Austrianism:

1.  Austrians do NOT support financial deregulation

Financial deregulation means for most people what Dr John Hewson called for recently in the AFR:  More competition in banking, the entry of foreign banks, lower interest rate margins, more non-bank lenders.

This is deregulation WITHIN a monopoly fiat paper money system.  Modern banking is nothing other than a simple form of recursive embezzlement.  To allow competition to see who can lie and embezzle “the best” is MADNESS.

Austrians call for one of the following:

(a) the outlawing of fractional reserve banking;

(b) the abolition of the “definition of a moral hazard” (central banking) and simultaneous implementation of free banking (possibly after resolution or nationalisation and then re-sale of insolvent or TBTF banks); or

(c) if either of these is not possible, the HEAVY regulation of cartel banking – in particular the highest possible reserve ratio enforced by government to minimise the deliterious effects of the Ponzi-like activity.

[(d) no Austrian I know supports this fourth option, but I do:  Nationalisation is preferable to the current system, so I would prefer nationalisation of the banking system compared to the current system we now have.  I base my analysis on Hoppe’s critique of democracy – you do not want competition in the production of “bads” and given banking produces “bads” it is better to have an inefficient govt-owned monopoly producing “bads” rather than competition in the produciton of “bads”.  But this is not a common Austrian position.]

You don’t believe that Austrians are against financial deregulation? 

Read this, from the Austro-Libertarian website, LRC.  You will never see such an article in the WSJ , the AFR, the Economist or any other supposedly “free market” mainstream publication.  The mainstream free marketeers are quiet on central banking and free banking.  They are deadly quiet, because they know to talk about it means the death of their careers.  So they shut up.  Only Austrians dare to raise this issue against the money trusts.

Noted Austrian Ron Paul did not support the repeal of Glass-Steagall in the US for these very reasons.  That alone should be proof enough.

2.  Austrians do not want to deregulate everything that moves immediately

A corollary to the first point is that Austrians clearly do not want to deregulate indiscriminately.  Order matters. 

Austrians do NOT support the deregulation of banking WITHOUT the abolition of legal tender laws and the central bank FIRST.

Austrians do NOT support elimination of the minimum wage and all social security benefits whilst at the same time allowing bailouts for the banking system and billion dollar bonuses to Goldman Sachs.

Austrians do NOT support the destruction of family farms into major industrial farms when the central bank supported financial institutions are bankrupting the small farmers and financing the large agricultural corporations.

The order matters.  Austrians focus on the abolition of the central bank, returning banking to a “normal” market function rather than a symbiotic tool of the State, and a return to a free market in money, allowing any currency to be chosen by the people to act as money.  We believe it’s likely gold will be chosen but are open the market deciding.  We believe good outcomes will result when the market is given the opportunity to innovate and supply new money products in a GENUINELY free market.

There is nothing more basic to the economy than its unit of exchange.  Corrupt that, and the whole economy is corrupted.  Austrians are the only economists who see how monopoly money is inefficient, how it is fundamentally corrupt and how it needs to change.

Anyone who characterises Austrians as just another group of free market capitalists should think carefully.  And read Rothbard before parroting that kind of idiocy again.