SW Richmond's  Instablog

Everyone knows by now that bubbles mean capital misallocation.  Look around you and you can see misallocated capital everywhere.  Capital misallocations occur whenever anyone borrows money and builds a business on a false premise. In an era of phony inflated money supply, nearly all economic premises are false ones because the cost of capital (as money) is artificially low.

Example: big box electronic retailers. These stores popped up like mushrooms all over the U.S., to feed an unsustainable consumer craving for useless consumerist Chinese electronic junk.

(Now-empty) store: misallocated capital.

(Idle) factory to manufacture useless consumerist Chinese electronic junk: misallocated capital.

(Unused) massive 4-lanes-each-way suburban road to get to shopping center where big box electronics retailer (and other similar retailers of useless consumerist Chinese junk) is located: misallocated capital.

(Anchored) ships to transport endless container loads of useless consumerist Chinese junk: misallocated capital.

(Deserted) dock facilities, piers, cranes, trucks, rail lines and rail cars, regional warehouse distribution centers for endless streams of useless consumerist Chinese junk: misallocated capital.

See? We had plenty of capital, but rather than reinvest it in productivity, enabling the production of still more capital, we wasted it on consumerism, and then ate the rest of it by consuming it rather than reinvesting it. Now we will have to replenish capital by SAVING MONEY AND NOT SPENDING IT ON USELESS CONSUMERIST CHINESE JUNK.

IMO an economy where saving is rewarded and which continues to plow resources back into the productive process is actually deflationary; prices fall and standards of living rise. Hard for banksters to make double-digit returns in such an environment. Enter the Federal Reserve.

Bubbles also mean overly-confident consumers.  99.99% of consumers don't follow the financial markets for hours each day; they are too busy doing wage-labor and picking their kids up from daycare.  Of course, these consumers experienced the phony joy of bubblenomics, and borrowed and spent their way into oblivion.  Should they have known better?  In many cases, probably.  But given the ever-inflating environment, can consumers be blamed for overconsuming when businesses were misallocating so much capital?  Didn't consumers merely mimic the environment they were living and working in? 

Would anyone care to guess to where we should trace the origins of that environment?

Today I received from my Mortgage lender a HELOC offer.  The kicker?  A variable rate capped at 18% (usury).  I might as well move to Latvia and get a mortgage denominated in CHF.  And because I do follow the markets very closely, I am aware of that fact.  But how many others are?

How log will we allow this system to continue?

Disclosure: The author is not a financial professional.  Please DYODD.  The author is long precious metals and various other dollar short instuments and hedged by a substantial cash position.

The moment we've all been waiting for has arrived.  China has publicly stated that they believe it is time for the U.S. to issue debt denominated in Yuan.  If anyone had any doubts about the future China sees for its currency, those doubts have now either been removed, or moved into the category of "denial".  This is a takeover move, plain and simple.

www.reuters.com/articl...

A brief quote: "NEW YORK (Reuters) - A top Chinese banker on Sunday called on the U.S. government and the World Bank to sell yuan-denominated bonds in Hong Kong and Shanghai to encourage the development of debt markets in those centers and to promote the yuan as a major international currency."

The linked article, which I recommend you read in its entirety, sounds the death knell for the US Dollar as reserve currency.  China's FOREX policy has changed from merely questioning the Dollar's international status to outright declaring it dead:

"He said that foreign currency risk, particularly the risk that the yuan would continue to appreciate against the U.S. dollar as it has in recent years, could be hedged."

To paraphrase: "We don't want to be paid in dollars anymore, Ben is printing them at such a rate as to render them valueless."

This announcement will be met by another, perhaps final, dollar pump (currently in progress).  If the U.S. ever issues Yuan bonds in any quantity we will one day resemble Iceland: broke, starving, hideous tax rates, and completely beholden to a foreign lender for survival.  In Iceland's case, the foreign lender is called "IMF".  In our case, the foreign power has a navy of its own that wants ours out of the Pacific and IO, for starters.

For more information about Iceland, I suggest reading the blog "Surviving Iceland".  On the subject of tax rates in the U.S., "Cap and Trade" and "Health Care Reform" are nothing more than hideous tax increases, with the aim of strengthening the Treasury market.

Don't say we didn't warn you.  The last bubble is the Treasury market.

Disclosure:  I am not a financial professional, and my rantings are not to be construed as making any sense at all.  Please DYODD.  My portfolio is long various U.S. Dollar short instruments (PM's, TBT, DXO, miners) and hedged by a substantial cash position.

Forgive me if this point has been belabored to death.

I spent just a few moments watching Obama speak about the things his administration is doing w.r.t. the Chrysler and GM bankruptices.  He said a lot of things were done by the automakers in working with his "automotive task force".  Eventually, he got around to saying something about them needing funding "that only governments can provide".

Please, this is not a partisan issue.  There's no doubt in my mind that McCain would be doing the same thing as Obama.

I would appreciate it greatly if someone, anyone, would point out the exact place in the Consitution or even in US Code where it authorizes a president to form an industry task force, actively involve that task force in forcing the outcome of a bankruptcy process, and then bestowing the resultant new companies with taxpayer money.

If the answer is "this has to be done because there is no one else to do it" then that means, simply, that rule of law has been suspended and we are in fact living under martial law.  Absent a martial law declaration (which we have not had), if the actions being undertaken right now are not authorized, then this is a rogue government that has unbridled itself from the rule of law.  Such a situation if it existed must not be allowed to continue.  There is no grey area here.  Either we are living under the rule of law or we are not.

I am fairly well versed in the Constitution itself but I have no background in case law related to economic Supreme Court decisions, bankruptcy law, etc.  Is there a precedent for these actions that has stood the test of Constitutional scrutiny?  I'd really like to know.  If anyone can point me to some specifics I'd really appreciate it.

Thanks to anyone who reads this.