Why fiat paper money is always trashed in the end

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.

Jack Douglas says what I just said: Retiring baby boomers = fiscal Armageddon

I just spent a whole blog post talking about Old People!  And now Jack Douglas has exactly the same thoughts! 

Amazing.  Perhaps I’m not as mad as the doctors say I am?  I hope no one is copying my stuff out there in the blogsphere!  Give me attribution if you’re going to copy my stuff, please!

James Quinn’s predictions for 2010: Double dip by year’s end

James Quinn (he of TheBurningPlatform.com) has some interesting predictions for 2010 here at MarketOracle.

Essentially, he’s predicting a double dip. higher unemployment, broken ARMs blowing up all over America, a massive CRE bust, higher interest rates and a surge in gold and silver as the US dollar tanks.  He also predicts the fringes of Europe will be on fire by the end of the year and the big EU banks will start to melt in the heat. 

I also predict a Japanese boa-constrictor-style double dip and a CRE bust in Oz and the US, but don’t see a big hike in interest rates coming up in the US, where the bond market is controlled as tightly as the price of milk in the old Soviet Union.  I suspect the Marxist central planners at the Fed would prefer to let go of the US dollar rather than kill the economy through a spike in real interest rates.  They’ve shown themselves to be completely gutless on controlling growth in the money supply over the past decade.  What will give them the requisite courage this year?  I doubt they’re going to get religion and allow the market for bonds for fall freely without intervening to save at least the short end of the market.

Let’s see what happens.  I thought it couldn’t get any worse than the last two years, but the blindness, the short-termism, the venality, the stupidity, the plain madness of govt can never be underestimated, and it looks like we’re in for another downdraft from the idiot-savant govt’s “good intentions” this year.  The only thing this idiot-savant is good at is lying and displaying extraordinary amounts of chutzpah.

There is no God.

Peter Schiff’s predictions for 2010: The worst is yet to come!

Peter Schiff’s predictions for the U.S. economy in 2010: higher unemployment, higher interest rates, and higher inflation (oil and gold higher, possibly much higher).  A dollar crash (a drop of 50-70%) is inevitable and will possibly occur in 2010 rather than 2011.

Nice.

[Note: You can watch the full video here if the embedded video below doesn’t work due to blocking by YouTube.com]

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.

We have lift-off!

When you see a chart like this, you just know gold’s going to US$1,200 in a matter of weeks.  You just know it.

Stop press! Gerald Celente’s Top 10 Predictions for 2010

When Gerald Celente talks, I listen.

Karmaisking’s Trade of the Decade

Having thought through Bill Bonner’s Trade of the Decade, I don’t like it.

The “market” for US debt is a controlled market.  If bond prices fall, the Fed simply buys its own issuance.  So yields can stay low indefinitely.  The market is rigged so analysing supply and demand dynamics makes no sense in this market.  The US dollar itself may tank, but I don’t see bond yields being allowed to spike up.  A doubling of interest rates any time in the next decade would spell disaster given the debt loads most corporations and individuals in the Anglo-sphere now routinely carry.

A more interesting question that Bill Bonner doesn’t seem to recognise is a demographic one.

I have to ask the question “What do Old People do?”

With a massive wave of ageing Baby Boomers retiring this coming decade, their investment decisions will still matter a great deal.

I suspect they’ll gradually get out of stocks and into annuities and other bond-like instruments for security.  They’ll also curb their spending and do what old people generally do – fuss around the supermarkets comparing the discount prices of oranges and milk and incontinence pads.

Given this, I tend to think that stocks will continue to go down, bonds will hold up with remarkable resilience, and soft commodities will continue to climb.  There will be fewer able-bodied people in the West pulling stuff out of the ground and growing food, but old people will still want to be fed.  Real estate in hotter climes will continue to go up and real estate in colder climes will continue to go down.  Old people tend to feel the cold and seem to like the heat, so they will tend to sell up and move to where their arthritis doesn’t hurt as much. 

So, my Trade of the Decade is:

Sell stocks.  Indiscriminately.  Doesn’t matter where.  Doesn’t matter what.  Just sell them or short them or get out of them.  Get ahead of the Old People in cashing in your retirement funds.

Buy commodity futures (soft commodities in particular).  Buy retirement villages in hotter coastal areas that were vacation destinations in previous years.

Hold short-term bonds and cash.  Hold (don’t accumulate) gold and silver.

I think these trends will continue well beyond 2010.  Why go against a trend when it continues to make sense?

Sell stocks.  Buy commodities (especially soft commodities).  Simple.

 

Big news! Bill Bonner’s NEW Trade of the Decade

When Bill Bonner talks, I listen.  In 2000, he recommended you get out of stocks and buy gold.  He dubbed this the “Trade of the Decade”.  And he was so right, it’s unbelievable how much money you would have made had you followed his advice.

Now, he’s just issued his new Trade of the Decade.  Here it is, hot off the electrons spinning around the internet:

Sell US debt/Buy Japanese stocks.

That’s right – buy Japanese stocks! 

Unlike Ambi-Pur below, he still believes Japan will produce good Toyotas and great Lexus models and the Nikkei can’t go much lower than it’s dived already.  I had the same thoughts.  I’m also unsure of myself, which is when I make the most money, because the investment is fraught with uncertainty which makes everyone nervous and therefore the price appealing.

I might buy the Nikkei today, especially given Ambi-Pur predicts that the Japanese economy faces Armageddon.  The only comment I would make is that this Deal of the Decade doesn’t look like it’s going to make as much money as the last Deal of the Decade.  And I still like gold, I still like cash, and I don’t think US bonds will collapse just yet.

To quote Bill Bonner:

As long-suffering Daily Reckoning readers will recall, we announced our ‘Trade of the Decade’ in 2000: Sell Stocks; buy gold.

“It turned out to be a good plan,” observes colleague, Merryn Sommerset, in a recent Financial Times story. “In 2000, you could buy an ounce of gold for $280 (the average price over the year). Now, it will cost you about $1,100. At the time, Bonner saw what most others did not. He saw the US not as an economy carefully and cleverly managed by then Federal Reserve chairman Alan Greenspan and his passion for low interest rates, but as a massive credit bubble waiting to burst.

“He also saw the massive and growing national debt, the trade and budget deficits, and fast growth in the money supply as factors that would naturally debase the dollar over the long term. He also saw the credit bubble as global rather than peculiar to America. So it made sense to him to hold the only non-paper currency there is – gold.”

So what’s next? What’s the trade of the coming decade? Well, your editor has decided not to double-down on the identical trade. Gold will remain in our core holdings, but not in our Trade of the Decade for the next 10 years. Why? Because we think the US economy is going the way of Japan.

Japan went into a slump in 1990. It has come out…and gone back in…and come out again…and gone back in again. In terms of the amount of wealth destroyed – at least, on paper – it was the worst disaster in human history. The value of real estate went down 87% in some cities. Stocks fell from a high of 39,000 on the Nikkei Dow down to the 7,000 range in 2009…their lowest point in 27 years.

Why such a bad performance? As we keep saying, if you really want to make a mess of things you need taxpayer support. The Japanese put more taxpayer money into the effort to prevent the correction than any nation theretofore ever had. The result: the correction was stalled, delayed, and stretched out over more than two decades.

And now, US economists are looking at Japan…not with alarm, but with admiration. They are beginning to believe that the Japanese model is the way to go…because it prevented widespread unemployment and a deeper slump.

Here’s our best guess:

Now that the US economy is caught in the same sort of de-leveraging process that gripped Japan, the same sort of “remedies” will inevitably be employed…leading to the same results, more or less.

We’ll skip the details for this morning. You’ll hear plenty of them in the days, weeks, and months ahead – promise!

Instead, this morning, we’ll turn to our Trade of the Decade for the next 10 years. There are, of course, two sides to this trade…the long side and the short side. We had no trouble finding things to put on the short side. In a de-leveraging period almost everything goes down. We could have stuck with US stocks, for example. They’ll probably continue to come down…just as they did in Japan.

But who knows? US stocks just had their worst decade since the ’30s. What are the odds that they’ll have another bad decade? We don’t know. But what we look for in our Trade of the Decade, for the sell side, is something that has just had its best decade ever…something that has been going up for so long people think it will go up forever…something that everyone wants.

What does that describe? Well, the thing that comes closest is US Treasury debt. Yields have been going down (meaning, the price of debt is going up) since 1983. And now, despite a supply that seems to be going off the charts, demand for Treasury bonds, notes and bills has never been stronger. What’s more…if our analysis of the US economy is correct…the supply of Treasury debt is going to continue to rocket upward for many years. Deficits of $1 trillion to $2 trillion per year are going to become commonplace.

How long will it be before the market in Treasury debt crashes? How long will it be before hyperinflation…or a debt default…sends investors running for cover? We don’t know…but it seems a likely bet that it will happen sometime in the next 10 years.

So, on our sell side…we’ll put US Treasury debt.

How about the buy side? Ah…that is something we’ve struggled with. While there are many things that seem likely to go down, there aren’t many that seem destined to go up. Let’s see, what has been beaten down, dissed, battered, and abused for the last 20 years or more? What is it that people don’t want? What is it that they expect to go down…possibly forever?

Of course…Japanese stocks!

So there is our Trade of the Decade:

Sell US Treasury debt/Buy Japanese stocks.

Crazy, right?

Maybe not. Treasury debt has been going up for the last 27 years. Japanese stocks have been going down for the last 20 years.

Does this mean we’re giving up on gold? Not at all. We’re sticking with gold. Aurus eternis, or something like that. The yellow metal is what you buy when you think the financial authorities are making a mess of things. We have little doubt about it. So we’ll continue to buy and hold gold…until the financial system blows up.

But gold at $1,100 an ounce is fully priced. It is not cheap. It’s been going up for the last 10 years! At this level, it is insurance against a monetary catastrophe and a speculation on when and how the blow-up will finally come. It is definitely worth having. And holding. And using to protect your wealth.

But the trade of the decade is a way of making money…by buying/selling two opposing assets that are at extraordinary valuations. It is not a speculation on what MIGHT happen. It is merely a bet on the phenomenon known as “regression to the mean.” Things that are out-of-whack tend to go back into whack…

If we’re right, over the next 10 years, the most popular investment of 2009 – Treasury debt – will go out of fashion. The least popular investment of 2009, on the other hand – Japanese stocks – will surprise everyone by finally showing signs of life.

In any event, the trade is fairly low risk. What are the odds that US Treasury debt will go up? What are the odds that Japanese stocks will go down? Of course, we don’t know…things that are out-of-whack can get farther out-of-whack. But we count on time to sort it out. And hope we live long enough to be able to say, “we told you so.”

Ambrose Evans-Pritchard’s predictions for 2010

Ambrose is a weird dude with an even weirder name (what would his nickname have been at school? Ambi-Pur?). 

However despite his weirdness, he is the closest thing the UK has to an Austrian commentator.  He accurately predicted deflation in 2009.  He didn’t pick the upturn in mid-2009, but then who did?  Strangely, even though he accurately diagnoses the problem, he advocates super low interest rates as a way out of the mess caused by too much debt.  So he is as stupid as the commentators in Ft.com after all.

His thinking is often shallow and muddled, he doesn’t have much of a theme other than “we are doomed”, but he is nothing if not decisive in his views.  He’s the closest thing to an interesting economics commentator the UK has got.

Here are his predictions for 2010:

The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system.

As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan’s Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. The surplus regions (China, Japan, Germania, Gulf ) have not increased demand enough to compensate for belt-tightening in the deficit bloc (Anglo-sphere, Club Med, East Europe), and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent.

We will be reminded too that the West’s fiscal blitz – while vital to halt a self-feeding crash last year – has merely shifted the debt burden onto sovereign shoulders, where it may do more harm in the end if handled with the sort of insouciance now on display in Britain.

Yields on AAA German, French, US, and Canadian bonds will slither back down for a while in a fresh deflation scare. Exit strategies will go back into the deep freeze. Far from ending QE, the Fed will step up bond purchases. Bernanke will get religion again and ram down 10-year Treasury yields, quietly targeting 2.5pc. The funds will try to play the liquidity game yet again, piling into crude, gold, and Russian equities, but this time returns will be meagre. They will learn to respect secular deflation.

Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China’s yuan in the beggar-thy-neighbour race to the bottom. By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.

The European Central Bank will stick to its Wagnerian course, standing aloof as ugly loan books set off wave two of Europe’s banking woes. The Bundesbank will veto proper QE until it is too late, deeming it an implicit German bail-out for Club Med.

More hedge funds will join the EMU divergence play, betting that the North-South split has gone beyond the point of no return for a currency union. This will enrage the Eurogroup. Brussels will dust down its paper exploring the legal basis for capital controls. Italy’s Giulio Tremonti will suggest using EU terror legislation against “speculators”.

Wage cuts will prove a self-defeating policy for Club Med, trapping them in textbook debt-deflation. The victims will start to notice this. Articles will appear in the Greek, Spanish, and Portuguese press airing doubts about EMU. Eurosceptic professors will be ungagged. Heresy will spread into mainstream parties.

Greece’s Prime Minister Papandréou will balk at EMU immolation . The Hellenic Socialists will call Europe’s bluff, extracting loans that gain time but solve nothing. Berlin will climb down and pay, but only once: thereafter, Zum Teufel.

In the end, the Euro’s fate will be decided by strikes, street protest, and car bombs as the primacy of politics returns. I doubt that 2010 will see the denouement, but the mood music will be bad enough to knock the euro off its stilts.

The dollar rally will gather pace. America’s economy – though sick – will shine within the even sicker OECD club. The British will need the shock of a gilts crisis to shatter their complacency. In time, the Dunkirk spirit will rise again. Mervyn King’s pre-emptive QE and timely devaluation will bear fruit this year, sparing us the worst.

By mid to late 2010, we will have lanced the biggest boils of the global system. Only then, amid fear and investor revulsion, will we touch bottom. That will be the buying opportunity of our lives.

I agree the overall theme will be deflation despite the desperate efforts of the central banks to start a fire, but I’m surprised by his apocalyptic predictions on Japan. 

It still has a massive trade surplus and is still producing good Toyotas and great Lexus models.  If Ambrose is predicting over-capacity and deflation worldwide, that hardly signals higher interest rates in Japan.  And if the Fed can buy at the long end to bring bonds down to 2.5%, why can’t Japan?  And if QE means hyperinflation for Japan, why doesn’t Bennie’s trillion dollar Fed purchases and massive QEs in the US also mean hyperinflation in the US in 2010?  And why will exactly the same policies “bear fruit” in the UK (via the emollient of a gentle and controlled depreciation of the pound) when they will produce nothing but hyperinflation in Japan?

What’s he got against the Japanese?  I was thinking if any economy could not get worse, it would have been the Japanese economy.  I was even thinking it might be a buy.  With Ambrose screaming apocalypse over Japan’s woes (no worse, no better than the US or the UK’s), I might look at buying the Nikkei index this year…

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.

Marc Faber’s predictions for 2010: Stock volatility and U.S. bond collapse

I’m trying to collate 2010 predictions from those analysts I most respect.  I’ve already linked to Keen’s in a previous post (essentially he is predicting Japanese style stag-deflation, with a possible dramatic second leg down in stocks, similar to the Great Depression). 

By way of contrast, this is Marc Faber’s:

-A stronger dollar.
-The U.S. market will outperform emerging markets for the first half of 2010, but stocks and associated indices will then likely have 10-20% correction, followed by another rally.
-The worst thing you can do for a long-term buy is purchase U.S. Treasuries.
-The private sector is de-leveraging while the government levers up. This process is expected to continue.

Steve Keen’s predictions for 2010

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.

The imminent global food crisis

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

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.

Gold wins gold: Best asset to hold this decade

One picture truly can tell a thousand words:

Twitch, twitch…

More twitches on my financial seismograph.  This time on the fringes of Europe.

Enormous pressure will be brought to bear on Latvia, Iceland and Greece to get their budgets under control and pay their debts. 

If one country is allowed to run, then chaos will ensue, with lots of other indebted governments asking the question, “If there’s no shame in defaulting, why don’t we do it too?”

That’s what’s happened in the US, with housing debt.  It’s no longer a source of shame to walk away from an underwater house.  So the whole housing crisis has become the creditor’s problem, not the debtor’s. 

Shame is really the only thing holding back the tide at the government level.  And once people work through the shame of default, anything can happen.

Which is why creditors cultivate shame in their debtors. 

Perhaps the Greeks have no shame?

We’ll see.

Worst decade EVER for stocks

We’ve just come through the worst decade ever for U.S. stocks.  Ever.  Worse even that the 1930s.

If you think the economic crisis is over within 2 years because of the various stimulus plans then you need to read history.

It ain’t over just yet.

Marc Faber reassures me that we are doomed

It’s mildly reassuring when another analyst is suicidal about the future.  It reassures me that I am not totally alone.

I disagree with Faber on two points however. 

First, it’s unlikely we will see hyperinflation and the “pure” monetisation of the trillions in US debt.  No hyperinflationist thinks through the precise mechanism of monetisation.  To increase the budget deficit by even more, the US govt will have to increase its own debt levels.  Bonds yields will likely spike at some point.  Then the Fed will try to buy the bonds to keep prices up (yields low).  This will allow relatively limited leakage of money to the US govt’s friends, but in no way plug the hole left by the collapse in the housing bubble.  Not only will govt spending not replace the hole left by Peak Credit, govt spending further distorts the economy, resulting in more failed private businesses the further away you get from the US govt’s largesse. 

You’ll end up with millions of debt-slaves sycophantically praying to the bankers and the Fed govt, running around doing the bidding of their Masters, and economic chaos and widespread starvation beyond the tiny green gated communities of bankers and govt employees.

Kabul is a good future model for the major Western economies (especially the US): There are some massive luxury (tasteless!) villas going up in Kabul.  I’ve seen them.  They are the houses for the govt ministers and associated hangers-on from the opium trade.  Nearby are the hotels the UN employees frequent.  Beyond these few blocks, hundreds beg for food from aid agencies and there’s complete chaos.  But within these tiny communities connected close to the corrupt govt, the opulence is incredible.  Govt banquets are frequent, whilst literally right outside the banquet halls, local Afghanis are starving.

That is our future.  Kabul is our future. 

And remember – Kabul is a city now created by the US.  It is what the US govt “wanted” to create (or at least what it did create after taking over). 

So that’s the best the US and UK govts can do today when “creating” a city.  That’s the proof regarding what they are capable of.  Sad, but true.

So that’s what they will continue to produce at home.

“Kabul” does not spell hyperinflation to me.  It spells stag-deflation with a possible sudden depreciation of the US dollar at some point – but not hyperinflation.  So I still think US govt bonds and gold are a better bet than US stocks if I was forced to choose.  Of course, long-term, farmland, security services, and govt jobs will all be highly sort after.  But I wouldn’t be buying canned food just yet.  You don’t want it to go out-of-date before you need to eat it.

Second, there will be war, but it won’t be to distract people from their debt problems.  It will be over the rapidly diminishing supply of food and water and oil.  The malinvestments caused by the decade-long low-density housing boom in the West have actually caused massive environmental destruction as well as financial chaos.  Literally millions of acres of fertile arable land across the US and Australia and other countries has been re-zoned and “redeveloped” (destroyed) for what is euphemistically termed a “more intensive use” (i.e. “for speculative property development”) – just at the time when unprecedented climate change has destroyed many “food basins” around the world (Myanmar, Thailand, Cambodia, Australia, China, Europe and the US have all experienced tsunamis, typhoons, hurricanes or drought in their vital farming areas).

CCD is also a massive threat to our food supply.  It is still a problem that no media organisation wants to talk about.  The cause is unknown (I suspect GM crops, but who knows?).

No one seems to have connected up the housing boom and bust with massive unprecedented and irreversible environmental destruction. 

But they will.  Eventually.

I’m with MISH

MISH, noted deflationist, does a superb hit piece on the inflationists here on his blog.

Bottom line is that banks cannot use “excess” reserves to kickstart the FRB process if there are no creditworthy borrowers to lend to.

Either mass debt forgiveness will have to take place to allow lending to restart, or Bennie Boy will have to get the helicopter powered up and literally throw money out into the streets for the plebs to pay back their loans and start borrowing again.  If the plebs don’t get the money to pay back their loans when the velocity of money slows down due to the high leverage levels grinding down the velocity of money to a crawl in every area other than where the banking parasites live, lending will continue to be frozen.

You cannot convince someone about to lose their job to borrow to gear up into the stockmarket or property market.  You cannot convince a bank to lend to a borrower who will go bankrupt in a few short months.

The US has reached “Peak Credit.”

What is hard to understand about that?

Why some Austrians are confused on this issue is beyond me.  Frank Shostak isn’t.  Robert K. Landis wasn’t in 2004.  Ludwig von Mises didn’t predict hyperinflation at the end of a credit-fuelled boom.  He predicted “catastrophe”, not “hyperinflation”.  Catastrophe in my view means “extreme price volatility in all asset classes leading to collapse of the division of labour and eventually state bankruptcy” – not hyperinflation.

So, excess reserves will subsidise the banks back to profitability, but the big banks will be islands of paper profits  in sea of red-ink insolvency in the real economy.