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How can Peter Schiff see simultaneous hyperinflation and high unemployment?

January 6, 2010 Leave a comment

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!

January 6, 2010 Leave a comment

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

January 4, 2010 Leave a comment

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?

January 3, 2010 Leave a comment

“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

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

Why isn’t Steve Keen an Austrian?

December 20, 2009 14 comments

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.