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Pater Tenebrarum

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  • How 2014 Could Be Like 1929 [View article]
    It should be pointed out though that not a single financial newspaper or major economist predicted anything but 'continuing prosperity' shortly before (and after) the crash of 1929 either. The view that 'recovery is just around the corner' was the predominant opinion throughout 1930 and 1931. The Harvard Economics Society's bulletins were the funniest in hindsight. Continually 180 degrees wrong, they were singing from their 'recovery will be here any moment now' hymn sheet even when unemployment soared above 20%, the money supply was in free-fall and thousands of banks were on the brink of insolvency. My point is not to assert any similarities about today and 1929 - it is only: you won't learn whether there is an economic downturn by reading predictions in Barron's or any other financial newspaper. All of them will miss the moment when the economy turns down. 
    Feb 22 12:59 AM | 3 Likes Like |Link to Comment
  • How Obama's 'MyRA' Plan Will Impact The U.S. Economy [View article]
    There is no such thing as a 'risk-free return', not even theoretically.
    Feb 3 06:22 AM | 3 Likes 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 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
  • The Fed Is Not Pushing Stock Prices Higher [View article]
    Much ado about nothing. The Fed's ministrations have increased the broad US money supply TMS-2 by approximately 80% since the fall of 2008. The central bank can create this money, but it has no control over where the money goes as it percolates through the system. Which assets the central bank buys at the outset in these money creation exercises is irrelevant in this context, as the recipients of the funds then have them available and can use them for whatever they like. At times, the new money will predominantly flow into stocks, as has happened recently.
    Apr 3 04:31 PM | 3 Likes Like |Link to Comment
  • Don't Believe The Hype In Gold [View article]
    GDP is probably one of the most useless and misleading statistics ever invented. It ignores all intermediate stages of the capital structure, which alone represent investment spending amounting to nearly $11 trillion per year. If one looks at the gross domestic output accounts, it turns out that the biggest sector of the US economy is actually manufacturing, and consumption is far smaller than the 'GDP' insinuates (the consumer is only about 35% of all spending in the economy, not 70%). Otoh, GDP includes government spending as though it contributed to 'growth' - when in reality, the government only consumes and has to take every red cent it spends from someone in the private sector (whether by taxation, borrowing or money printing). Moreover, 'real GDP' is vastly distorted by hedonic indexing, which has e.g. magically transformed all 'real' spending on IT products and software into multiples of nominal spending, an error that is cumulative over time. Anyone who claims that GDP is a sensible statistic has never really looked at it in detail.
    Most economic statistics put out by the government have only one rationale: they are used as a justification for government meddling in the economy.
    Jan 10 04:59 PM | 3 Likes Like |Link to Comment
  • Don't Believe The Hype In Gold [View article]
    I would add to the foregoing debate that the so-called 'general price level' actually cannot be measured. The always changing purchasing power of money of course exists, but that does not mean it can be measured. For measurement one needs a constant, and no such constant exists, as the purchasing power of money is influenced by both the supply of and demand for money and the supply of goods and services - all of which fluctuate. This is why it makes more sense to refer to inflation as the increase in the money supply. It has an effect on prices, but an eventual increase in the level of all or most prices is only one of them and not necessarily the most pernicious one. We can however make a number of apodictic qualitative statements:
    1. absent the increase in the money supply, prices would have been lower than they are (we just don't know by how much)
    2. relative prices in the economy will be distorted by increases in the money supply as money is not neutral, but enters the economy at discrete points. This is ultimately the cause for capital malinvestment, as the distorted price structure makes economic activities seemingly profitable that would not be assessed as such had the price revolution not occurred. Thus, an increase in the money supply leads to capital consumption.
    3. the fact that money is not neutral also implies that increases in the money supply redistribute wealth to the early from the later receivers of the newly created money. We do not all benefit from increases in the money supply - only a small minority does.
    Jan 7 06:59 PM | 3 Likes Like |Link to Comment
  • Paul Krugman Is Right [View article]
    Thanks for saving me the effort, I was about to chime in with the same point. :)
    Nov 19 06:24 PM | 3 Likes Like |Link to Comment
  • The Stock Market Rebound Is Coming [View article]
    There is always a rebound at some point after a big sell-off. The problem is though that complacency continues to be rife in this market. Positioning indicators are still showing that the bears have failed to jump on the train this time, the very first time this has happened in a big sell-off since the 2009 low. That says to me that this decline is qualitatively different.
    It also started right after the net speculative long position in stock index futures (dollar-weighted, all indexes combined) had reached an all time high - i.e., after futures traders sentiment had become more bullish than at any other top in history since stock index futures began to trade. Meanwhile, the net cash position of mutual funds is only 40 basis points above an all time low. Yes, a rebound will eventually come, but it will probably fail to make a new high and very likely will present an excellent selling opportunity (of course this will have to be appraised as it happens).
    Nov 15 04:39 PM | 3 Likes Like |Link to Comment
  • Lessons From 5 Years Of Economic Crisis [View article]
    "There is simply no other choice than this: either to abstain from interference in the free play of the market, or to delegate the entire management of production and distribution to the government. Either capitalism or socialism: there exists no middle way."

    Ludwig von Mises, in 'Liberalism'
    Oct 11 10:58 PM | 3 Likes Like |Link to Comment
  • Lessons From 5 Years Of Economic Crisis [View article]
    In fact, Hoover was a major interventionist. FDR merely continued what he started.
    Oct 11 10:49 PM | 3 Likes Like |Link to Comment
  • What Excessive Bullishness? [View article]
    How about: the options speculations index sits at the third highest reading in all of history, Rydex bull-bear ratio at its most optimistic level EVER, dollar weighted speculator net long positions in stock index futures close to a record high, the three 'risk appetite' indices combined at an all time high, large trader net call purchases at an all time high, small option trader net call exposure the highest since March 2011, NAAIM survey at over 81% bulls, Consensus Inc. and market Vane bullish consensus above 70% bulls (historically in the upper 5% of all readings), mutual fund cash-to-assets ratio within 40 basis points of an all time low (a full percentage point below the March 2000 reading), a 40 percentage point spread between 'smart money' and 'dumb money' confidence...I could go on, but you get the drift. You just happened to pick out three indicators that confirm your bias, but I can pick out 20 that would confirm that bullishness is indeed excessive and thereby confirm a bearish bias - almost needless to say, all the indicators I have listed above (except where indicated otherwise) are showing higher bullish sentiment than at the market's peak in 2007.
    Sep 25 02:25 PM | 3 Likes Like |Link to Comment
  • Gold And Silver Are On Their Last Legs ... For A While [View article]
    With the benefit of a little bit of hindsight...I'd like to experience more such 'last legs'.
    However, as I noted in one of my first comments on this article: the sentiment and positioning data did not support lower prices in the short term. Now that prices have risen, the situation is a bit trickier, as speculators have thrown a lot of money into gold over the past two weeks and there are numerous potential pitfalls dead ahead.
    Sep 4 07:11 PM | 3 Likes Like |Link to Comment
  • The Consequences Of Financial Repression [View article]
    I have a suspicion you're just repeating a sound bite you picked up somewhere. There is in fact no economic theory more strongly anchored in reality. Why not actually investigate Austrian theory by reading some of the works of its major proponents? They can all be downloaded for free at the Mises Institute's web site.
    Aug 14 05:18 PM | 3 Likes Like |Link to Comment
  • Spain's Banking System: Circling The Drain [View article]
    France is very lucky to be able to borrow at such low rates. But the reason for this is mainly that the market is - at the moment - not worried about the funding situation of the big French banks. France's banks together hold assets worth about 410% of the country's GDP (the 'big three' account for assets worth 240% of GDP).
    Back in November of last year, shortly before the ECB decided to extend €1 trillion in LTRO's, French interest rates shot up in parabolic fashion, as the market assumption was that the government would have to bail the banks out.
    However, while the LTRO may have temporarily eased funding stresses, it has done nothing to address solvency and capital shortfalls. I would therefore submit that the French banks - which have the by far biggest exposure to 'PIIGS' debt in the world - are not out of the woods. France's public debt meanwhile is approaching 90% of GDP and keeps growing. The more financial assistance France and Germany extend to other nations in the euro area, the less likely it is that their low interest rates will be sustained.
    France looks fine today, but could be in the soup tomorrow. In fact, along with Belgium, it represents the 'soft underbelly' of the euro area's core.
    Jul 19 01:51 PM | 3 Likes Like |Link to Comment