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Pater Tenebrarum

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  • The Teflon Market: When Will It Correct? [View article]
    In my case you err . If you read my blog you will notice that this is not my argument at all. I think his job should not even exist. Central economic planning is an impossibility - it founders on the same calculation problem that bedevils a hypothetical communist economic organization. So I am not proposing that anyone can do a 'better job' than Bernanke. I am saying that no-one can do this job. There simply should not be a central bank - money should be left to the free market.
    Feb 22 01:42 PM | 2 Likes Like |Link to Comment
  • The Teflon Market: When Will It Correct? [View article]
    Sorry, I thought I did explain it. I have been so busy lately, I am a bit late with catching up. When the Fed creates additional money from thin air, SOMEONE gets this new money first. Initially, it will be the banks or investment banks who sell the securities to the Fed and often also the government, because the banks will often reinvest the proceeds in new government securities. What is important is the fact that the total money supply has now increased by this amount. Whoever has the earliest access to the money can buy goods with it BEFORE their prices have risen due to the increase in money supply. Note here that the creation of new deposit money and reserves by the Fed allows the banks to expand credit from thin air further (so there will be 'early receivers' of new loans).
    Later, once the money has percolated through the economy, prices will have risen (or will have failed to decline, see below). So everyone from wage earners to people depending on fixed income will 'pay' , or will be taxed if you will, by seeing their money losing purchasing power. Moreover, and more importantly, when money from thin air is exchanged for real goods and services, an exchange of nothing for something takes place. You´and I can only exercise a demand for money by first selling our own products (be they goods we produce or our labor) in the marketplace. This means we contribute something to the pool of real funding before receiving money. He who spends money from thin air lays a claim to real goods while contributing nothing to the pool of real funding. As a consequence, fewer goods will be available to those actually producing wealth when they - after having exercised a demand for money by selling their own goods - want to exercise their claims on other goods from the pool. The consequence is a weakening of the pool of wealth and the ability of those producing wealth to produce more of it - which obviously affects us all. The rise in prices is if you will only a symptom of this fact.
    It is also possible that consumer prices will NOT rise because the production of goods and services is keeping pace with the increase in money supply. This does not alter the fact that economic damage has been done. For one thing, these prices would have fallen had no inflation occurred. For another, it is changes in relative prices - a distortion of price signals along the economy's capital structure - that will set into motion a boom that ultimately consumes scarce capital. So it is not necessarily the case that the issuers of long term loans will lose - a good example is provided by the late 1990s boom, when in spite of massive money supply inflation consumer prices did not rise much - but all the other attendant effects of inflation clearly took place.
    As to trading between firms, this is not comparable, since no new money is created when one firm sells bonds to another. The Fed's money supply inflation is fundamentally different , as the Fed need not acquire money to buy bonds by earning it. It simply creates it from thin air. I'm actually not sure why this seems so difficult to grasp.
    Note here, if - hypothetically - it were the case that an increase in the money supply would increase all our bank accounts by the same percentage instantaneously, and raise all prices by the same percentage simultaneously, then the money supply increase would be perfectly neutral. We'd all be aware that we haven't gotten any richer, but no economic damage would occur. It is precisely BECAUSE new money enters the economy at specific points, spent be early receivers, and because prices do not rise uniformly that the policy of inflation is so damaging. By the way, keep in mind here, the 'early receivers' gain only by dint of the fact that prices are still unchanged when they spend the new money.
    Feb 22 01:32 PM | Likes Like |Link to Comment
  • Apple: A Baby-Boomer Stock [View article]
    In my opinion you err if you think further advances in the stock can be predicted based on 'fundamentals'. The price trajectory of AAPL since the 2002 low is an exact self-similar replica of the rise of CSCO's stock in the 1990's tech bubble. People may recall that at the top, Cisco was revered as the 'must have tech stock that could do nothing wrong'. Its fundamentals looked excellent. The problem was only, all of them and more had been priced in by early 2000. Arguably AAPL will face massive competition from 'me too' products in the tablet and smart phone space over the next few years - many of which will offer roughly similar features at a lower price (also, not everyone wants to be locked into AAPL's closed universe - some people prefer the open source stuff, so there is a limit given by this fact as well). So even the future fundamentals may not be as rosy as the past ones. Lastly, Steve Jobs is the man responsible for a large part of the secret of AAPL's success, namely the design of its products. Losing him is not a trivial matter for the company.
    Certainly AAPL was a buy at $10 , and even in the $80's after the 2008 crash. The case that this stock is a buy at $360, with its market cap exceeding that of Exxon is much more difficult to make. I have no position in the stock, but if anything, I would consider buying puts on it. It is one of the biggest long positions held by both hedge and mutual funds, and the short interest ratio is well below one (no-one dares shorting it). As far as sentiment goes, it could hardly be more lopsided.
    Feb 22 12:51 PM | Likes Like |Link to Comment
  • The Teflon Market: When Will It Correct? [View article]
    I would note to this though that the point Prechter makes about the situation in the 1980's is independent of one's faith in the validity of EW Theory. The important thing is that the widespread belief that some exogenous force - today it is the Fed - can through its actions invalidate market indicators that have always worked is probably mistaken. I personally believe that in the current case, monetary pumping has likely introduced a time lag effect, i.e., the market has run further and longer than it would have otherwise. But this means also that it has 'stored up' a lot more risk.
    Feb 18 01:43 PM | 3 Likes Like |Link to Comment
  • Gold Still Misunderstood by Many Analysts [View article]
    Bernanke's loose monetary policy certainly contributes greatly to gold's price rise. As to Bernanke and his role, he is a central economic planner - in a system of free market capitalism his role would not even exist.
    Feb 14 03:37 PM | 1 Like Like |Link to Comment
  • The Inflationary Road to Perdition We're On, Part 2 [View article]
    In the meantime, new malinvestments have likely been added, even before all the old malinvested capital could be liquidated or redirected. Rapid money creation has not ceased as you aver, it has gone into overdrive instead. Since mid 2008, the true US money supply has increased by over 30% - it has been one of the most rapid increases in the supply of money of the entire post World War 2 era.
    One simple way of ascertaining that the Fed's monetary pumping has not only arrested the economy's attempt to realign the structure of production properly and achieve a sustainable production-consumption balance is the ratio of investment spending on durable business equipment vs. non-durable consumer goods production. This ratio (admittedly a crude representation of what is happening, but it serves) is back at the extreme recorded at the height of the Nasdaq bubble in 2000. It is way above its historical norm. With the Fed pretending that the cost of capital should be near zero, we can assume on sound theoretical grounds that the economy is suffering from a renewed bout of capital malinvestment - and the actually observable data seem to confirm it.
    Feb 10 01:06 PM | Likes Like |Link to Comment
  • The Inflationary Road to Perdition We're On, Part 2 [View article]
    The process is slightly more involved than that. Again, I strongly recommend reading up on several previous articles:
    www.acting-man.com/?p=... (quanto easing)
    www.acting-man.com/?p=... (money and credit)
    As well as on a series of articles I wrote on the practice of fractional reserves banking. In fact, you might want to read those first, as they give a really comprehensive overview of the entire process , including its history and all the pertinent legal and ethical questions.
    Part 1: www.acting-man.com/?p=...
    Part 2: www.acting-man.com/?p=...
    Part 3: www.acting-man.com/?p=...

    However, I will attempt a brief explanation.
    When the Fed creates new money from thin air such as in your example, this creates both new bank reserves at the Fed ('excess reserves' these days) and new fiduciary media (i.e., deposit money) at the bank where the seller of the securities (in your case GS) has his account. It is important to note that no real production has occurred that is so to speak 'backing' this new deposit money - and yet, the total money supply has increased by this amount. However, not everybody in the economy has seen his bank balance increase by a pro rata amount.
    Consider the hypothetical case: say the money supply is $1 billion and the Fed increases it by $100 million - the next day, every account holder sees his bank balance increased by 10%. We would all know in this case that we have not become richer, since prices would likely adjust to the new , higher money supply just as quickly. Money would in this hypothetical case be truly 'neutral'. After all, it does really not matter how large the total supply of money is - any supply will be just as good enough as any other - the only difference would be that with a lower supply of money, all prices would be commensurately lower, and vice versa with a higher supply.
    The problem is of course that this hypothetical example does not depict reality. In reality, newly created money enters the economy at specific points. We do not ALL see our bank balances increase by the same amount when the Fed creates new money from thin air. The newly created deposit money can now be lent out by the bank - and due to the fractional reserves multiplier, the banks can actually create another 900% of new money from thin air on top of this new deposit money.
    So the first ones to profit are the banks. They now can lend out money they did not have before - and it came from thin air, one must always stress that. Nobody produced anything of value. Someone then receives the loans the bank makes on account of having this new money available. It may be, as was the case during the housing bubble, a land developer or home builder. Other participants in the economy do at that stage not yet realize that the money supply has increased, but now the developer/builder begins to use the money to bid for resources (labor, materials, land...). The amount of available real resources however has not changed when the new money was created. So this bidding for resources with new money will drive up their price.
    Everybody who is one step further down the line will now have to pay more for said resources - and the further down the line from the new money's point of origin one is, the bigger one's relative loss of purchasing power becomes.
    Note however that the initial receivers of the new money did not suffer the same drawback - when they entered the market bidding for real goods and services, the old prices still prevailed. It takes time for the price effects to percolate through the entire economy, but the bottom line is that the earlier receivers gain to the detriment of the later receivers.
    In addition to all of the above, the manner in which new money enters the economy also leads to a distortion of the economy's capital structure, or structure of production, as relative prices are distorted first (for more details I refer you to the articles linked above). This in turn sets off the boom-bust cycle, which you will certainly agree is a bad thing for all of us. It impoverishes us - as can be easily ascertained by looking at the end result of the housing bubble. This bubble was one of the results of the above described process.
    Feb 10 12:54 PM | Likes Like |Link to Comment
  • The Inflationary Road to Perdition We're On, Part 1 [View article]
    1. No, they are not. It is not possible to 'measure' anything with precision in the economy. This is the central conceit of modern day macroeconomic theorists, that they believe one can press the individual actions of billions of human beings into facile equations. The economy is not machine. 'money lags are always the same length'? What is that supposed to mean?
    2. I'm not sure what you mean by that, but the central point about reserve requirements is that sweeps have largely eliminated them since 1995.
    3. The Fed uses interest rate targeting, this is true, but the topic of excess reserves is pertinent to the current situation and to QE, especially since there seems to be a lot of confusion out there about how the pyramid scheme actually works (I have detailed this in another post here: www.acting-man.com/?p=... )
    4. He DID tighten monetary policy. In judging whether monetary policy is or isn't tight, it is irrelevant what legal reserves have done, since they do not form part of the money supply. This is why I showed the long term chart of the true money supply. One can see there that money in the economy actually exhibited a negative growth rate until the reins were loosened again in 1982. Nonetheless, I'm certainly not a member of the Volcker adulation club. In my opinion he saved a system not worth saving.
    Feb 10 12:20 PM | Likes Like |Link to Comment
  • The Inflationary Road to Perdition We're On, Part 1 [View article]
    As Frederic Bastiat famously said:
    "If goods don't cross borders, armies will"
    Feb 9 01:32 PM | Likes Like |Link to Comment
  • The Inflationary Road to Perdition We're On, Part 2 [View article]
    1. yes, you are of course correct that this is not a truly comprehensive description of what has occurred. However, I have addressed these points in great detail in past posts (on the blog) and this specific article was not the place to rehash it all in such detail.
    2. I would definitely agree in principle. We only need to consider that even the Marxian system survived for seven decades, in spite of the impossibility of economic calculation under such a system (of course the communists used prices formed in the capitalist West to guide their planning, so they were not completely in the dark).
    Our economy by contrast has a fairly large free market component, and even during the worst boom episodes real wealth is created alongside the waste of scarce resources. When we say 'the boom impoverishes us' it does not mean that we will necessarily be poorer at the end of the boom than on its eve. The term 'impoverishment' is only applied in a relative sense, i.e. we would have been better off absent the credit boom. The fact remains though that capitalism has created increasing wealth over time, and we may be able to 'muddle through' for a long time yet. In part however this also depends on how policy makers will act going forward. Like I said in the article, they may create a very problematic situation simply by mistake, and we can not entirely rule out that things will come to a head faster than expected.
    Consider in this context the case of post WW1 Germany and its famous hyperinflation episode. In 1919/20, the UK foreign office sent a few observers to Berlin to ascertain the state of the German economy's health. These observers reported back that 'Germany's economy is solid and Germany appears to be rich' (I am paraphrasing). So on the surface, an imminent economic catastrophe seemed nigh impossible. Alas, it only took two more years of reckless monetary policy to visit utter destruction on Germany's economy. So a lot will depend on things that are at this stage still unknowable.
    Feb 9 01:26 PM | Likes Like |Link to Comment
  • The Inflationary Road to Perdition We're On, Part 2 [View article]
    Inflation redistributes wealth to the first receivers of newly created money from the later receivers (who will have to pay higher prices, i.e. their savings will lose purchasing power). No preceding production is necessary to achieve this redistribution of wealth - it essentially consists of exchanges of nothing (newly created money from thin air) for something (the real resources that are getting bought with said money).
    If it is not theft, then what is it?
    Feb 9 01:10 PM | 1 Like Like |Link to Comment
  • The Inflationary Road to Perdition We're On, Part 2 [View article]
    I will address this point in detail in a future post. Let us just say for now that money is NOT a creature of government - it originally arose in the free market (see Carl Menger, and von Mises' regression theorem - here: mises.org/daily/1333).
    The main point here is however that nowadays, most economists agree that the free market is superior to central economic planning (it would be difficult to deny this even for empiricists given the collapse of the Soviet system) - but curiously, they deny that this truism extends to the sphere of money. They are mistaken.
    Feb 9 01:07 PM | Likes Like |Link to Comment
  • The Inflationary Road to Perdition We're On, Part 2 [View article]
    This does not alter the fact that the total amount of money in the US economy has increased by over 30% since August of 2008. So far, the public sector has done a very good job of replacing the private sector's retrenchment in credit. Note here that you must differentiate between money and credit. Although the two are linked in the fractionally reserved fiat money system, they are NOT the same thing. For some background information please read:
    Money and Credit - There is a Difference:
    www.acting-man.com/?p=...
    I would also note, market forces are clearly exerting a deflationary pull since the credit crisis broke out. It is definitely POSSIBLE for genuine deflation - this is to say, a decline in the money supply - to occur, if the monetary authority lets the market do what it wants to do. Alas, it has not happened yet, and Ben Bernanke is on record that he will do whatever it takes to avert it. Of course we can not know the future. As I mention in this article, Bernanke may no longer be the one deciding these things in the future, if a strong enough political backlash were to occur. However, at this point this is just speculation - we will have to wait and see.
    Feb 9 01:01 PM | Likes Like |Link to Comment
  • Gold Outlook 2011: Irreversible Upward Pressures and the China Effect [View article]
    Since about 700 - 900 tons of gold trade on the LBMA alone every single day and the world's total stock of gold is about 165,000 tons, your worries about an ETF that has bought 2000 tons in 6 years seem way overblown.
    Jan 12 12:21 PM | 3 Likes Like |Link to Comment
  • Smaller Explorers vs. Major Miners [View article]
    Rubicon and Fronteer both are among the brightest prospects in the exploration sector. Another one that looks good to me is Tower Hills (THM on the AMEX).
    Dec 23 12:51 PM | 4 Likes Like |Link to Comment
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