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Pater Tenebrarum

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  • Japan's Abenomics: Time To Take Stock [View article]
    So-called 'Abenomics' is simply the same hoary inflationism and mercantilism frequently practiced by what I call the 'John Law School of Economics' since the early 18th century. It never works. If one could get rich by devaluation and inflation, the whole world would be a Utopia of riches by now, led by a prosperous Zimbabwe.
    The inherent contradictions of this policy are especially glaring in Japan. With unemployment at 4%, what did Abe think needed 'fixing'? Japan with its aging and shrinking population needs inflation about as urgently as a hole in the head. The theory that society gains when the value of money is diminished is abject nonsense anyway, but in Japan's case it is even bigger nonsense than normally.
    Oct 22 05:26 PM | 1 Like Like |Link to Comment
  • Which Side Of Goldman Sachs Is Right About Gold? [View article]
    While I largely agree with you, for details see this article:

    I would point out that Indian import demand or Chinese imports of gold are largely irrelevant to the gold price. The total supply of gold amounts to some 175,000 tons - why would it matter if India imports a few hundred tons more per year? The LBMA alone trades more gold in three days than is produced by all the gold mines in the world over a whole year.
    People must stop analyzing gold as though it were an industrial commodity. It is a currency, or an investment asset, its supply and demand equation does not look like that of copper or oil. The most important factor is in fact the reservation demand of current holders of gold, and what that demand is can only be ascertained, or rather estimated, by indirect means - this is to say by studying the macro-economic factors that influence the gold price (such as real interest rates, the steepness of the yield curve, inflation expectations, the trend of the dollar, credit spreads, the trust in monetary and fiscal authorities, economic developments that influence monetary policy, etc.).
    You are partly discussing these things here, and that is imo the correct approach. Looking at Indian gold imports on the other hand is not going to tell you anything about future gold prices.
    Oct 9 06:43 PM | Likes Like |Link to Comment
  • Credit Is Money [View article]
    No, it isn't. The difference between money and credit explained:
    Sep 13 07:20 PM | 2 Likes Like |Link to Comment
  • There's No Way In Hell The Fed Will Taper [View article]
    There are a few issues I have with the 'taper' debate. First of all, we cannot be certain that the rise in bond yields is due to 'taper' speculation. Just because the mainstream financial press said so doesn't make it so (they always need an easily graspable 'reason' as to why market moves happen). In fact, it seems extremely unlikely, as tapering would likely lead to a decline in inflation expectations, which is bullish, not bearish for bonds. The Fed's buying or abstention from buying is always swamped by the effect of inflation expectations on the bond market (just look at what bonds did during QE1 and QE2).

    The next thing is that I doubt that 'tapering' or lack thereof should have any influence on the gold market. Did 'QE infinity' help the gold price? No, it didn't. Then why should 'tapering' hurt it? What is important to the gold market is the damage that has ALREADY been inflicted on the economy by the Fed's inflationary policy. In other words, when the seeming positive effects (the short term increase in aggregated 'economic activity') are swamped by the discovery of the longer term negative effects (e,g. capital malinvestment due to distortion of relative prices in the economy), then the gold price should react to this reassessment of past inflationary policy by market participants.
    Sep 10 06:21 PM | 4 Likes Like |Link to Comment
  • Apple: Reality Bites, So Time To Sell [View article]
    Carl Icahn bites back.
    Aug 13 04:01 PM | Likes Like |Link to Comment
  • Financial News Reports Mislead On Gold Hedges [View article]
    In addition to the fact that the media are incessantly busy spinning gold bearish stories fed by those same sources (which is quite a contrast to the complete silence that accompanied the bull market), there is the fact that hedging makes no sense with interest rates at zero and gold showing no contango out to 2015. It almost guarantees losses to hedge production under such circumstances. It would be quite different if interest rates were at say 5% and gold contracts were to sport a fat contango accordingly.
    Aug 7 05:32 PM | Likes Like |Link to Comment
  • Ben Bernanke's 3 Stages Of Recovery [View article]
    "Nothing is more difficult than trying to explain to someone that mild inflation is good and deflation is a death sentence for an economy."

    The main reason why it is difficult to convince people of this is that it is utter bunk. According to this 'mild deflation is bad' theory, the computer and electronics industries should have been in permanent depression since day one. Bernanke's 'explanation' only makes one wonder how this man ever graduated in economics. The selling price is immaterial to a producer: what is important is the spread between his input costs and his selling prices.
    Incidentally, the historical period when US real economic growth was by far the greatest ever was the Gilded Age, which coincided with, you guessed it, mild deflation.
    Jul 22 05:41 PM | Likes Like |Link to Comment
  • The Fear Trade Has Been Demolished [View article]
    The long term negative consequences of the central bank actions of the past five years have yet to arrive. One could have written a similar article in 2006, along the lines of 'the Fed has bested the business cycle'. The so-called 'fear trade' is merely in abeyance and could return at any time. In fact, the activities of central banks since the crisis have been the most egregious case of misguided monetary activism of the entire post WW2 period. It stands to reason that the next manifestation of fear in the markets will dwarf what we have seen last time around.
    Jul 22 03:48 PM | 2 Likes Like |Link to Comment
  • The Future For Gold Miners [View article]
    Sorry, but if you think 'Indian demand' is important for the gold price then you simply do not understand the gold market and are liable to make a costly mistake at some point. India's demand, central bank buying, mine supply, none of them matter much for the price of gold. India's demand is but a drop in the ocean. What Indians buy in one year, is traded in London in a single day. The total supply of gold in the world is about 175,000 tons. Gold is not a commodity like oil or copper that gets 'used up'. It is more akin to a currency, or an investment asset with monetary characteristics if you will. You will never come to correct conclusions if you analyze any of the annual primary supply/demand data - they are simply irrelevant. If you want to know how gold's price is actually formed, here is a good start: (What Determines the Price of Gold?)
    Jul 18 01:28 PM | 1 Like Like |Link to Comment
  • The Paradigm Shift Has Begun - This Isn't Going To Be Pretty [View article]
    You are correct. Bank reserves are the cash assets of banks. However, there is an additional wrinkle no-one has mentioned, so I will do that now. Whenever the Fed buys securities from a non-bank (an entity that is not part of the Federal Reserve system), it creates BOTH bank reserves AND new deposit money in favor of the non-bank. For instance, in December 2008, the Fed altogether bought securities worth $440 billion from non-banks. Meanwhile, for purposes of analysis, bank reserves are not counted as part of the money supply, as they are effectively 'outside of the economy' as long as they remain with the Fed. However they can be used as the basis for creating new deposit money at the required reserve ratio (which for all intents and purposes is close to zero de facto, if not de iure, due to sweeps). The banks usually turn around and buy new treasury securities after selling to the Fed - but they do not need to draw down their reserves to do so. They can create deposits in favor of the government (or other borrowers) even so. Bank reserves are usually only drawn down when a) the Fed sells assets again, or b) bank customers want to withdraw cash from their accounts. Since the Fed has the note issuing monopoly, banks must then (unless they have enough vault cash on hand) draw down reserves so they can hand currency to the customer.
    Jun 13 04:17 PM | 3 Likes Like |Link to Comment
  • The Importance Of Gold Mine Supply: A Terrific Opportunity For Gold Investors [View article]
    Sorry, but I will stick with the allegedly 'erroneous' assumption that mine supply is largely irrelevant for the gold price. Why this is so becomes clear when thinking a bit more closely about how the gold price is actually determined, see:

    Reservation demand is the by far biggest force in the gold market, for the simple reason that the stock of gold is so large. Mine supply currently adds some 1.4% to the global stock of gold every year. Let us say that mine supply were to increase or decrease by 20% in a given year. That would imply a change in the total supply of gold of 0.28% over a year. It simply makes no sense to claim that this is important. You only have to compare this by analogy to other currencies to immediately recognize that it cannot possibly matter. Imagine the supply of US dollar were to rise or decline by an additional 0.28% in a given year. Do you believe that would materially alter the dollar's exchange value? The answer is in fact that just as is the case with gold, it would probably have no effect whatsoever. There areso many things that would be much more important to the dollar's value in the course of a year, that a 0.28% variation in its supply can be completely ignored in analysis. And so it is with gold as well.
    Jun 10 03:02 PM | Likes Like |Link to Comment
  • Why Inflation Never Came [View article]
    Bank reserves are not part of the money supply. The Fed has however altogether blown up the true US money supply by almost 90% anyway since 2008 (NOT counting bank reserves). That IS the inflation. Rising consumer prices are one POSSIBLE effect of inflation, and not the most important or most pernicious one. The real problem of inflation is that it distorts relative prices in the economy (which causes capital malinvestment) and redistributes wealth (from late receivers to early receivers of the newly created money). There is absolutely no need to try and reinvent the wheel just because no CPI inflation has appeared on the scene yet. The Fed inflated all out from 1933 to 1966 and no CPI inflation was visible either. It is impossible to tell in advance which prices in the economy will rise and when. Moreover, the effect of an increase in the money supply on prices depends also on the demand for money and the supply of and demand for goods. For this reason it is actually not possible to accurately 'measure' price inflation either, as there is no yardstick, no constant, one could use for the measurement. The statistical artifact we know as the CPI can at best inform us about a general trend in consumer prices, but it sheds no light on why they are rising, and there is no such thing as a 'general price level' (as an aside to this, the Fisherian 'quantity equation' is therefore a completely useless tautology. Note it needs the fudge factor 'velocity', a nonsensical concept). The example of the period 1933 to 1980 underscores an important fact however: 'price' inflation can arrive with a considerable lag, but once it does, it can become pretty significant. In any case, if one wants to know whether there is or isn't inflation it makes no sense to look at price indexes. All one has to do is look at the growth of the money supply. In free unhampered market economy, prices would be continually falling as economic productivity improves. We therefore know one thing for certain: if prices are 'stable' then they are definitely higher than they would be in a true free market not meddled with by the central bank.
    May 21 05:03 PM | 6 Likes Like |Link to Comment
  • The Real Experiment That Is Being Carried Out In Japan [View article]
    I can tell you. They have a terrible 4.2% unemployment rate and their extremely affluent consumers enjoy mildly declining prices every year.
    Abe couldn't let that stand, after all, he's heard for years how horrible the evil deflation was.
    May 15 07:38 AM | 5 Likes Like |Link to Comment
  • The 12 Biggest Mistakes The Media Make When Covering Gold Markets [View article]
    Generally I agree with what you write here, but I would point out that the concept of 'intrinsic value' has no place in economics. All value judgments are subjective, there exists no such thing as 'intrinsic value'.
    If Krugman actually made arguments involving intrinsic value, it only serves as additional proof that he's not an economist but little more than a political hack. I will never understand how the Nobel committee could demean its prize by giving it to him....probably the prize has become a contrary indicator.
    Apr 26 01:36 PM | 3 Likes Like |Link to Comment
  • Are Gold Stocks Oversold? [View article]
    Are gold stocks oversold? Is that a trick question?
    Apr 24 08:09 PM | 2 Likes Like |Link to Comment