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Pater Tenebrarum  

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  • 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, 2011. 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, 2011. 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: (quanto easing) (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:
    Part 2:
    Part 3:

    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, 2011. 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: )
    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, 2011. 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, 2011. 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, 2011. 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, 2011. 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:
    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, 2011. 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:
    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, 2011. 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, 2011. 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, 2010. 12:51 PM | 4 Likes Like |Link to Comment
  • Smaller Explorers vs. Major Miners [View article]
    Agree with you that African m&a in the gold mining space is going to heat up further. Another one worth checking out in this context is KGN (Keegan Resources) in Ghana.
    Dec 23, 2010. 12:48 PM | 3 Likes Like |Link to Comment
  • Turbulent Times Dead Ahead? [View article]
    As of yet, they have not happened, but 3 month LIBOR has recently (in late November) begun to creep up slightly and now resides at a higher level than in the previous months. It could well be the initial move of a greater dislocation yet to come. It is in fact quite odd that market data currently display a strange mixture of rising and falling confidence, depending on what data one looks at. My suspicion is that the inflationary policies of the central banks are a major reason for this dichotomy.
    Dec 20, 2010. 09:25 PM | Likes Like |Link to Comment
  • Gold Is Poised for a Big Correction [View article]
    I actually think a blow-off rally in gold is more likely in the near term than a correction. We already had the correction, and it looks like a bullish, upwardly slanted running correction to my eyes.
    Dec 20, 2010. 01:30 PM | Likes Like |Link to Comment
  • ECB Board Members Throw Cold Water on ‘QE’ – For Now [View article]
    The problem as I see it is actually this: there can be no free market capitalism without failure. By saddling tax payers with the losses of banks that have gotten into trouble due to their misguided speculations, governments have thrown out the capitalist rule book. This can not possibly improve future behavior by credit market participants - socialization of risk is a repudiation of free market principles.
    This has been done everywhere, not just in Ireland of course. Contrary to the assertions of many politicians, the world would not have stopped turning if a few big banks had gone under and their share- and bondholders had suffered losses. The difference should be very clear: these investors took a voluntary risk when they bought said securities. Tax payers on the other hand are forced to pay up. They didn't get any of the profits, but they sure are being saddled with the losses.
    What's more, the losses are no less real because of it - the question is only who shall bear them: those responsible, or everyone else?
    Dec 14, 2010. 02:03 PM | 1 Like Like |Link to Comment