QE, Inflation, And The Case For Precious Metals [View article]
Thank you. Excellent article and I enjoyed it. Here’s my take:
Sovereigns borrow for 2 main reasons: 1) to pay for war or expand their empires (such as the Kings of Europe several centuries ago); or 2) to satisfy domestic needs: for example, to maintain living standards, win elections, or prevent civil unrest
When it comes time to repay debt, sovereign governments have 3 choices: 1) raise taxes; 2) cut domestic spending; or 3) debase the currency and pay back with debased currency. Traditionally, this was done by adding base metals to gold or silver coins, then it was done by printing more paper currency, and now it is done electronically.
The US spends money for both reasons above. It can not find the political agreement to raise taxes or cut spending. Politicians find it increasingly difficult to obtain political agreement to spend more money to stimulate the economy. This leaves the Fed as the only agency capable of taking action to stimulate the economy (by holding long term interest rates low and thereby keeping mortgage rates and corporate bond interest rates low—that’s the theory anyway) and as the only agency able to “pay back” the sovereign debt, through debasing the currency (this is not something they will admit to, but it is something desperate governments have done many times).
It would be theoretically possible to pay down our debts without debasing our currency. This would require brutal honesty by all. Our living standard would fall dramatically for several years. Yes, you would be poorer, and ouch, I would be poorer. Taxes would be much higher and government spending would be much lower. Interest rates would soar.
We would have a major dose of the medicine that the IMF has doled out to other countries. Can we do it? Frankly, I doubt it. However, we might have a shot if we promised that we would provide food, shelter, medicine and safety to all at government expenses until the unemployment rate reached 6% or so. This would be a lot cheaper than bailing out the banks and a whole lot cheaper than suppressing the riots and violent demonstrations that would come with the (hopefully short) economic downturn that would follow an honest attempt to live within our means and pay down our country’s debts.
QE, Inflation, And The Case For Precious Metals [View article]
Thank you. Excellent article and I enjoyed it. Here’s my take:
Sovereigns borrow for 2 main reasons: 1) to pay for war or expand their empires (such as the Kings of Europe several centuries ago); or 2) to satisfy domestic needs: for example, to maintain living standards, win elections, or prevent civil unrest
When it comes time to repay debt, sovereign governments have 3 choices: 1) raise taxes; 2) cut domestic spending; or 3) debase the currency and pay back with debased currency. Traditionally, this was done by adding base metals to gold or silver coins, then it was done by printing more paper currency, and now it is done electronically.
The US spends money for both reasons above. It can not find the political agreement to raise taxes or cut spending. Politicians find it increasingly difficult to obtain political agreement to spend more money to stimulate the economy. This leaves the Fed as the only agency capable of taking action to stimulate the economy (by holding long term interest rates low and thereby keeping mortgage rates and corporate bond interest rates low—that’s the theory anyway) and as the only agency able to “pay back” the sovereign debt, through debasing the currency (this is not something they will admit to, but it is something desperate governments have done many times).
It would be theoretically possible to pay down our debt. This would require brutal honesty by all. Our living standard would fall dramatically for several years. Yes, you would be poorer, and ouch, I would be poorer. Taxes would be much higher and government spending would be much lower. Interest rates would soar.
We would have a major dose of the medicine that the IMF has doled out to other countries. Can we do it? Frankly, I doubt it. However, we might have a shot if we promised that we would provide food, shelter, medicine and safety to all at government expenses until the unemployment rate reached 6% or so. This would be a lot cheaper than bailing out the banks and a whole lot cheaper than suppressing the riots and violent demonstrations that would come with the (hopefully short) economic downturn that would follow an honest attempt to live within our means and pay down our country’s debts.
I’m not sure that a shortage of consumer spending is the problem (I prefer letting the bad debts liquidate as soon as possible), but if it is, then one possible solution would be to provide people with “spending certificates” based on last years tax payments. These would be like tax rebates but only usable for purchases. For example, let’s say that we provide every taxpayer with a 25% spending certificate based on last years taxes. If someone paid $20,000 in taxes then they would receive $4,000 in spending certificates. They could buy any good or service with the spending certificates. The seller would receive the spending certificate and could then exchange the certificates with the federal government for money. The spending certificates could not be exchanged for any financial instrument or loaned out, so the original purchaser could not deposit the spending certificate in a bank or use it to buy stock. In other words, the rules would seek to encourage consumer spending of the additional “money”, rather than investment or savings. Obviously, some people would save the money they were going to spend, and use the spending certificates instead of that money, and so there would still be some increase in saving or investing. The spending certificates resemble tax rebates, but must be used for purchases (much like food stamps, but for any purchase). Actually, I never understood why Japan did not do something similar. Thanks. Bill
I’m not sure that a shortage of consumer spending is the problem (I prefer letting the bad debts liquidate as soon as possible), but if it is, then one possible solution would be to provide people with “spending certificates” based on last years tax payments. These would be like tax rebates but only usable for purchases. For example, let’s say that we provide every taxpayer with a 25% spending certificate based on last years taxes. If someone paid $20,000 in taxes then they would receive $5,000 in spending certificates. They could buy any good or service with the spending certificates. The seller would receive the spending certificate and could then exchange the certificates with the federal government for money. The spending certificates could not be exchanged for any financial instrument or loaned out, so the original purchaser could not deposit the spending certificate in a bank or use it to buy stock. In other words, the rules would seek to encourage consumer spending of the additional “money”, rather than investment or savings. Obviously, some people would save the money they were going to spend, and use the spending certificates instead of that money, and so there would still be some increase in saving or investing. The spending certificates resemble tax rebates, but must be used for purchases (much like food stamps, but for any purchase). Some inflation is likely. Actually, I never understood why Japan did not do something similar to prevent deflation. Thanks. Bill
James Kostohryz Positions For 2012: 100% Cash The Only Way To Play This Market [View article]
James, great analysis, as always. Several questions. 1) is there asymmetry between the psychology of losing money during a bear market and then exiting too late and not wanting to get back in, and the psychology of not making money during a bull market and then entering too late and not wanting to get out? In other words, you are suggesting that investors avoid bear markets because, among other thing, investor psychology causes them to lose money. My question is whether that works as strongly in the other direction also.
2) Related question. If one were in cash, then what would trigger a move back into the markets?
And 3) why do you prefer cash over short ETFs, especially if one is talking about a period of months? I don’t yet buy the argument that short ETFs fade to zero, since the same math argument could be made for any market item whose value fluctuates. There is some monthly cost to short ETFs, but if we look at a 3 to 6 month window wouldn’t short ETFs deliver more funds to buy back into the market than cash? I’m not arguing here, just trying to figure this out. Thank you, and may you and your family have a great set of holidays! Bill
I don’t know if long term US interest rates will rise or not. However, generally if demand falls or debt supply rises then rates will rise. This might happen if: 1) investors could get a higher return from other investments, such as stocks, or foreign bonds, 2) investors decide that US bonds are risky, i.e. a falling dollar leading to repayment in less foreign currency than were used to buy the bonds, or fear of a debt write down, 3) excess supply, for example, if the government borrowing increases, 4) inability of foreign buyers to buy bonds, for example, lack of export surpluses in developing countries; or 5) the US government raises short term rates to fight inflation. I feel that the biggest risk is 2a.
No one knows the future. However, if it were possible for a county to borrow at low interest rates forever and increase its debt load without limit, then that government could increase wealth beyond limit. No one would ever have to work and we would all be rich. That has never happened, and even though our central bank may be quite clever, it would seem that sooner or later, either the debt is repaid (unlikely), written off, or no one will loan to that country except at high interest rates. Thanks. Bill
Well Akram, you’re a pretty sharp guy (sorry, couldn’t help myself—may Somerset Maugham forgive me).
Here’s the golden question. If gold tends to weaken when real interest rates rise, then what would happen if the US were to experience a rise in bond interest rates due to investor lack of confidence in the US being able to pay its debts through taxation and having to resort to money printing? (Well, I suppose they could reduce the supply of bonds by endlessly buying their own—but of course, isn’t that paying off the old bonds with money printing?)
Usually, a government bond crisis sends investors flocking to US bonds. Err, screech of tires and grinding of reverse gears, as investors look around for other alternatives—Japanese bonds (a bit shaky), some European bonds (maybe, but depends on the Euro future—whatever that will be). If there are no other “safe havens” when what happens to the price of gold? Does it go up by default as the only “currency” in town, or does it go down due to rising interest rates?
U.S. Treasuries To Be Avoided At All Costs [View article]
Wealth comes from savings, from increased productivity, and (for a while) from debt-driven demand. When the debt can not be paid back in anything equal to its original buying power (plus interest) then wealth disappears.
We live in a world where the total wealth now appears to be shrinking. True, one asset may go up, or we may have inflation here or deflation there. Governments may swap their debts for those of private entities. They may even succeed here or there for a time to increase wealth by using ever increasing debt bases.
It is beyond my present ability to quantize the amount of wealth that was based on debt over the last 70 years, or the amount of wealth that will disappear as the debts come due and are only partially paid back. I have raised this issue for the last 15 years or so, but no one was very interested (because everyone was becoming so “wealthy”). However, if you look at the total production of the world and figure out how many people are actually needed to produce the cars, food and mined goods that we want, we can see that many middle class people around the world and many poor people in the developed countries actually produce nothing and are supported as if in mid-air by the magic of government debt and low interest rates.
When the wealth of the world shrinks everyone madly scrambles to keep a piece of a declining pie. Wealth may disappear through taxes, inflation, unemployment, drops in interest rates, bankruptcies, and lower commodity prices. The multi-varied mechanisms for the destruction of wealth turn investors into blind men desperately searching the various parts of the elephant. But the elephant is made of ice and the ice is melting.
There is nowhere to hide. I believe that it is impossible to predict what will happen in a world such as this. For among other reasons, political emotion and the desperate acts of politicians will take precedence over business plans and finance sheets. Who can honestly say they can predict the acts of voters or politicians? No asset will withstand the mob as it desperately attempts to hold on to wealth and a living standard that turns out to be an illusion.
What to do? Get out of debt. Stockpile whatever resources have stored wealth—no one really knows which ones will do better than others. And expect the following—much of the wealth in any form will disappear. Get ready for a lowered living standard, and prepare to enjoy it as best you can. Somehow your great grandparents managed to do it.
Very good article, and I also enjoyed your recent article on Japan. I happen to agree with the thesis that China has over-invested and delayed the inevitable crunch with loose credit (and I also believe that they have hidden the extent of the problem with very inaccurate accounting). I also agree that Japan will face a bond crisis. Further, I believe that the US will also face a bond crisis. Akram, here is my question: let's say that one believes in a crash in China, and a bond crisis in both the US and Japan--how can one make those bets in an cost efficient way when the timing is so uncertain? It could be years before any of those events happen. By the way, do you believe that short, and especially ultra short, ETFs decay in value over time due to volatility? I have read arguments each way. Thanks. Bill
European Impact On U.S. Equities Is Overstated [View article]
Regarding European leadership as “…stupid, ill-informed, and made up of people who ‘just don't get it.’
Of course the leaders of Europe are generally well-educated, often comprising technocrats. But a degree from the Ecole Polytechnique does not guarantee any useful understanding of what must be done—as what must be done is to exercise massive courage. Of course, I know that this is often easier to recommend to others, than to exercise oneself.
To paraphrase Disraeli, the task of a politician in a capitalist democracy is to do what the rich people want in a way that is acceptable to everyone. In other words, modern politicians serve the upper class (their financial contributors through election contributions, and providers of such benefits, especially in the US, as the speech circuit, board memberships and the revolving door) but they must also get elected, which requires pleasing the voters and the political activists in their own parties. This system has its merits as it sometimes works well (and sometimes not) in balancing the large financial interests against the general population needs. Besides, no one has found a better system.
The crisis in Europe seems relativity straight forward. Many banks, especially the French banks, are insolvent due to their ownership of shaky sovereign bonds. The French would like the Germans to bail out the banks through some European vehicle that would purchase bonds. The Germans are ambivalent about the idea. The courageous thing to do would be for a German politician to agree to such a bond plan before the cost gets too high. This would be the end of their career. So instead, the Germans use the crisis to push their own agenda of austerity and they will wait for a major bank run before they agree to a bond purchase plan. The result will most likely be greater financial hardship for many people in Europe than would be necessary, and even some risk that events could spiral beyond the zone of repair. If they are going to buy bonds better to do it now. But, they lack the little courage.
I will point out that I believe that the modern idea that wealth can be created and the middle class preserved (when wages are too high to be globally competitive) though the creation of debt is insane. The fact that it has worked since WWII does NOT prove its sanity. It worked for a while when the US ran the world, and worked a while longer when other countries picked up the idea of preventing recessions through low interest rates and deficient financing. The better path would be to inform the people of the developed world that their collective living standard is far, far too high relative to their productivity and that governments will cease lying to them that they are able to maintain living standards through government-induced cheap debt. But, they lack the big courage.
Do I think the European leaders get this idea? I doubt it. They appear mainly lost in their hopeless task of pleasing both the population and their rich sponsors. This is why their efforts seem so pathetic. They know what they must do by their own standards, yet have trouble achieving it. This is why they appear to act like clowns. This is their lack of the small courage. Further, even it they achieve it, and finally buy their own bonds, they will have accomplished little, and understood less. As the real issue is the insanity of trying to maintain living standards through borrowing (whether by governments, banks or anyone else). But no one wants to hear about this, and the politicians there will not dare to talk about it. This is their lack of the big courage.
European Impact On U.S. Equities Is Overstated [View article]
Regarding European leadership as “…stupid, ill-informed, and made up of people who ‘just don't get it.’
Of course the leaders of Europe and the US are generally well-educated, often comprising lawyers in the US and technocrats, including those with engineering degrees, in Europe. But a degree from a law school or from the Ecole Polytechnique does not guarantee any useful understanding of what must be done—as what must be done is to exercise massive courage. Of course, I know that this is often easier to recommend to others, than to exercise oneself.
To paraphrase Disraeli, the task of a politician in a capitalist democracy is to do what the rich people want in a way that is acceptable to everyone. In other words, modern politicians serve the upper class (their financial contributors through election contributions, and providers of such benefits as the speech circuit, board memberships and the revolving door) but they must also get elected, which requires pleasing the voters and the political activists in their own parties. This system has its merits as it sometimes works well (and sometimes not) in balancing the large financial interests against the general population needs. Besides, no one has found a better system.
The crisis in Europe seems relativity straight forward. Many banks, especially the French banks, are insolvent due to their ownership of shaky sovereign bonds. The French would like the Germans to bail out the banks through some European vehicle that would purchase bonds. The Germans are ambivalent about the idea. The courageous thing to do would be for a German politician to agree to such a bond plan before the cost gets too high. This would be the end of their career. So instead, the Germans use the crisis to push their own agenda of austerity and they will wait for a major bank run before they agree to a bond purchase plan. The result will most likely be greater financial hardship for many people in Europe than would be necessary, and even some risk that events could spiral beyond the zone of repair. My idea is that if they are going to buy bonds better to do it now. But, they lack the little courage.
I will point out that I believe that the modern idea that wealth can be created and the middle class preserved (when wages are too high to be globally competitive) though the creation of debt is insane. The fact that it has worked since WWII does NOT prove its sanity. It worked for a while when the US ran the world, and worked a while longer when other countries picked up the idea of preventing recessions through low interest rates and deficient financing. The better path would be to inform the people of the developed world that their collective living standard is far, far too high relative to their productivity and that governments will cease lying to them that they are able to maintain living standards through government-induced cheap debt. But, they lack the big courage.
Do I think the European leaders get this idea? I doubt it. They appear mainly lost in their hopeless task of pleasing both the population and their rich sponsors. This is why their efforts seem so pathetic. They know what they must do by their own standards, yet have trouble achieving it. This is why they appear to act like clowns. This is their lack of the small courage. Further, even it they achieve it, and finally buy their own bonds, they will have accomplished little, and understood less. As the real issue is the insanity of trying to maintain living standards through borrowing (whether by governments, banks or anyone else). But no one wants to hear about this, and the politicians there will not dare to talk about it. This is their lack of the big courage.
Sovereign Equivalent Of A 'Friendly' Takeover? [View article]
The Super Debt Bowl semi-finals
Watching the Euro-zone news lately reminds me of days of hyped buildup to the Super Bowl. But in this game there is only one team. The fans are cheering or booing the team as they run around trying to find the goal line. The problem is that the team consists of the political equivalent of Elmer Fudd, the Three Stooges, and the Keystone Cops. The frustrated US is sending in plays from the sidelines, “use the quarter-buck sneak—buy your own bonds”. I suppose eventually even this Euro team can figure out that it is supposed to scold Italy, Spain, Greece and all, for borrowing too much, and therefore earn the right for Europe as a whole to borrow more. Sure, it’s exciting to see the world go deeper into debt in order to solve its borrowing problems. And it’s great practice for the ultimate super debt bowl, when either Japan or the US compete to see which super bond borrower can bring down the world financial order and bring the gold (err, not gold, maybe brass) medal home. Thank you. Bill
If Things Are So Bad, Why Is The Market Going Up? [View article]
I agree with James that the markets will rise for up to six months, absent some extreme event. I am long in the markets, and I am instituting trailing stop orders to ride the markets up (if they go up) and then get out and stay out (other than possibly, precious metals, cash and shorting bonds) until the global debt problem is solved. Most of the extreme market events that I foresee possibly happening during the coming six months are debt related—an Italian bond crisis, an inability to agree on a US budget, or less-likely during that time, a Chinese credit crisis, or a US or Japanese bond crisis. Doesn’t the nature of these crises give us a hint? There is NO real economy and therefore no real stock market until the bad debts are written off; no government sleight of hand or magic formula can change this harsh reality. We will have depression or hyper-inflation, or less-likely—government honesty and hard, hard austerity.
We have maintained our living standard globally for many decades by stimulating debt creation, and increasingly and desperately by sovereign borrowing. The jig is up. What would you think of a relative that planned to pay off his debts, but was running up his credit card each month? And yet almost every major government in the world does just that and then goes out to the market to auction its new debt. A major bond crisis (one of many symptoms of the global debt crisis) is close to inevitable, as it is the last stage in the bad debt shell game. By the way, my own guess as to the real living standard absent the debt pump up is about 60%. If I were right, that would mean a global fall in living standards of 40%. We could see an uptick in social unrest or even war.
The only two exciting questions for me in the markets right now are: 1) which government will have its bond crisis first, and 2) will the US trigger hyper-inflation with its bond buying programs?
Global Financial Disaster Looms: European Banks Face Bankruptcy [View article]
Good article, and thank you. My main question for you James (see below) is whether you feel that hyper-inflation from governments buying their own bonds, or deflation, is more likely in the future.
To me the details of the European crisis have lost importance. Is there really any question that a continent that has incurred too much debt will borrow more to buy more time given any chance to do so? Would my brother-in-law Bob finally max out his last credit card for one last trip to Las Vegas? There is little drama here. The only real issue is the arm wrestling between Germany and France as to who should bail out the French banks—a European entity (i.e. mainly Germany) or local governments (i.e. France). And of course, there are a few very scary scenarios where the French and Germans wait too long while Humpty Dumpty falls off the wall, and finally the possibility that institutions and governments in Europe have miscalculated or even hidden the true costs of all of this.
What seems more significant to me is that another Great Depression is now just over the horizon. The crisis in Europe is just the latest bubbling volcano reflecting the massive magna of bad debt flowing through the world financial system. The particular eruptions of debt problems—Mexio, South America, South East Asia, Japan, the US and now Europe—are all part of the same hot money flow. Easy credit lifted living standards and asset values for far longer than we realized, but the economies of Japan, the US and Europe do not have enough real productive economic activity to support the asset values or pay off the debts incurred. The last stage—replacing bad bank debt with sovereign debt has played out over the last 15 years and now has reached the final act, as now both sovereign debts as well as the bank debt are suspect.
In a nutshell, major governments around the world are bankrupt. They have limited tax income, and mounting operating and debt obligations that they can not pay. Their expenses are rising as they try and stave off social unrest and attempt to support failed borrowers and lenders. Even at the present low interest rates in many countries (or example, the US and Japan) the sovereign debts can clearly not be repaid. Any jump in sovereign bond interest rates speeds up the end game.
What does it mean to have the major governments unable to pay their debts and bills? I would guess a massive drop in living standards. Nobody knows how much longer the shell game can go on—a year? Less? True, life goes on in the markets, even in a depression, but probably not at the stock price levels we have now.
And now for the last question every investor must now try and answer. Will the behavior of the EU, England, the US and Japan result in the typical deflation of a depression, or will the electronic printing of money involved in countries buying their own bonds result in hyper-inflation?
QE, Inflation, And The Case For Precious Metals [View article]
Sovereigns borrow for 2 main reasons:
1) to pay for war or expand their empires (such as the Kings of Europe several centuries ago); or
2) to satisfy domestic needs: for example, to maintain living standards, win elections, or prevent civil unrest
When it comes time to repay debt, sovereign governments have 3 choices:
1) raise taxes;
2) cut domestic spending; or
3) debase the currency and pay back with debased currency. Traditionally, this was done by adding base metals to gold or silver coins, then it was done by printing more paper currency, and now it is done electronically.
The US spends money for both reasons above. It can not find the political agreement to raise taxes or cut spending. Politicians find it increasingly difficult to obtain political agreement to spend more money to stimulate the economy. This leaves the Fed as the only agency capable of taking action to stimulate the economy (by holding long term interest rates low and thereby keeping mortgage rates and corporate bond interest rates low—that’s the theory anyway) and as the only agency able to “pay back” the sovereign debt, through debasing the currency (this is not something they will admit to, but it is something desperate governments have done many times).
It would be theoretically possible to pay down our debts without debasing our currency. This would require brutal honesty by all. Our living standard would fall dramatically for several years. Yes, you would be poorer, and ouch, I would be poorer. Taxes would be much higher and government spending would be much lower. Interest rates would soar.
We would have a major dose of the medicine that the IMF has doled out to other countries. Can we do it? Frankly, I doubt it. However, we might have a shot if we promised that we would provide food, shelter, medicine and safety to all at government expenses until the unemployment rate reached 6% or so. This would be a lot cheaper than bailing out the banks and a whole lot cheaper than suppressing the riots and violent demonstrations that would come with the (hopefully short) economic downturn that would follow an honest attempt to live within our means and pay down our country’s debts.
Thank you. Bill
QE, Inflation, And The Case For Precious Metals [View article]
Sovereigns borrow for 2 main reasons:
1) to pay for war or expand their empires (such as the Kings of Europe several centuries ago); or
2) to satisfy domestic needs: for example, to maintain living standards, win elections, or prevent civil unrest
When it comes time to repay debt, sovereign governments have 3 choices:
1) raise taxes;
2) cut domestic spending; or
3) debase the currency and pay back with debased currency. Traditionally, this was done by adding base metals to gold or silver coins, then it was done by printing more paper currency, and now it is done electronically.
The US spends money for both reasons above. It can not find the political agreement to raise taxes or cut spending. Politicians find it increasingly difficult to obtain political agreement to spend more money to stimulate the economy. This leaves the Fed as the only agency capable of taking action to stimulate the economy (by holding long term interest rates low and thereby keeping mortgage rates and corporate bond interest rates low—that’s the theory anyway) and as the only agency able to “pay back” the sovereign debt, through debasing the currency (this is not something they will admit to, but it is something desperate governments have done many times).
It would be theoretically possible to pay down our debt. This would require brutal honesty by all. Our living standard would fall dramatically for several years. Yes, you would be poorer, and ouch, I would be poorer. Taxes would be much higher and government spending would be much lower. Interest rates would soar.
We would have a major dose of the medicine that the IMF has doled out to other countries. Can we do it? Frankly, I doubt it. However, we might have a shot if we promised that we would provide food, shelter, medicine and safety to all at government expenses until the unemployment rate reached 6% or so. This would be a lot cheaper than bailing out the banks and a whole lot cheaper than suppressing the riots and violent demonstrations that would come with the (hopefully short) economic downturn that would follow an honest attempt to live within our means and pay down our country’s debts.
Thank you. Bill
Krugman, Keynes, And The Economy [View article]
Krugman, Keynes, And The Economy [View article]
China Will Stumble; I Guarantee It [View article]
James Kostohryz Positions For 2012: 100% Cash The Only Way To Play This Market [View article]
2) Related question. If one were in cash, then what would trigger a move back into the markets?
And 3) why do you prefer cash over short ETFs, especially if one is talking about a period of months? I don’t yet buy the argument that short ETFs fade to zero, since the same math argument could be made for any market item whose value fluctuates. There is some monthly cost to short ETFs, but if we look at a 3 to 6 month window wouldn’t short ETFs deliver more funds to buy back into the market than cash? I’m not arguing here, just trying to figure this out. Thank you, and may you and your family have a great set of holidays! Bill
Gold: Why It's A Leap Of Faith [View article]
No one knows the future. However, if it were possible for a county to borrow at low interest rates forever and increase its debt load without limit, then that government could increase wealth beyond limit. No one would ever have to work and we would all be rich. That has never happened, and even though our central bank may be quite clever, it would seem that sooner or later, either the debt is repaid (unlikely), written off, or no one will loan to that country except at high interest rates. Thanks. Bill
Gold: Why It's A Leap Of Faith [View article]
Here’s the golden question. If gold tends to weaken when real interest rates rise, then what would happen if the US were to experience a rise in bond interest rates due to investor lack of confidence in the US being able to pay its debts through taxation and having to resort to money printing? (Well, I suppose they could reduce the supply of bonds by endlessly buying their own—but of course, isn’t that paying off the old bonds with money printing?)
Usually, a government bond crisis sends investors flocking to US bonds. Err, screech of tires and grinding of reverse gears, as investors look around for other alternatives—Japanese bonds (a bit shaky), some European bonds (maybe, but depends on the Euro future—whatever that will be). If there are no other “safe havens” when what happens to the price of gold? Does it go up by default as the only “currency” in town, or does it go down due to rising interest rates?
Well, what do you think? Thanks. Bill
U.S. Treasuries To Be Avoided At All Costs [View article]
We live in a world where the total wealth now appears to be shrinking. True, one asset may go up, or we may have inflation here or deflation there. Governments may swap their debts for those of private entities. They may even succeed here or there for a time to increase wealth by using ever increasing debt bases.
It is beyond my present ability to quantize the amount of wealth that was based on debt over the last 70 years, or the amount of wealth that will disappear as the debts come due and are only partially paid back. I have raised this issue for the last 15 years or so, but no one was very interested (because everyone was becoming so “wealthy”). However, if you look at the total production of the world and figure out how many people are actually needed to produce the cars, food and mined goods that we want, we can see that many middle class people around the world and many poor people in the developed countries actually produce nothing and are supported as if in mid-air by the magic of government debt and low interest rates.
When the wealth of the world shrinks everyone madly scrambles to keep a piece of a declining pie. Wealth may disappear through taxes, inflation, unemployment, drops in interest rates, bankruptcies, and lower commodity prices. The multi-varied mechanisms for the destruction of wealth turn investors into blind men desperately searching the various parts of the elephant. But the elephant is made of ice and the ice is melting.
There is nowhere to hide. I believe that it is impossible to predict what will happen in a world such as this. For among other reasons, political emotion and the desperate acts of politicians will take precedence over business plans and finance sheets. Who can honestly say they can predict the acts of voters or politicians? No asset will withstand the mob as it desperately attempts to hold on to wealth and a living standard that turns out to be an illusion.
What to do? Get out of debt. Stockpile whatever resources have stored wealth—no one really knows which ones will do better than others. And expect the following—much of the wealth in any form will disappear. Get ready for a lowered living standard, and prepare to enjoy it as best you can. Somehow your great grandparents managed to do it.
Thank you. Bill
China Will Stumble; I Guarantee It [View article]
European Impact On U.S. Equities Is Overstated [View article]
Of course the leaders of Europe are generally well-educated, often comprising technocrats. But a degree from the Ecole Polytechnique does not guarantee any useful understanding of what must be done—as what must be done is to exercise massive courage. Of course, I know that this is often easier to recommend to others, than to exercise oneself.
To paraphrase Disraeli, the task of a politician in a capitalist democracy is to do what the rich people want in a way that is acceptable to everyone. In other words, modern politicians serve the upper class (their financial contributors through election contributions, and providers of such benefits, especially in the US, as the speech circuit, board memberships and the revolving door) but they must also get elected, which requires pleasing the voters and the political activists in their own parties. This system has its merits as it sometimes works well (and sometimes not) in balancing the large financial interests against the general population needs. Besides, no one has found a better system.
The crisis in Europe seems relativity straight forward. Many banks, especially the French banks, are insolvent due to their ownership of shaky sovereign bonds. The French would like the Germans to bail out the banks through some European vehicle that would purchase bonds. The Germans are ambivalent about the idea. The courageous thing to do would be for a German politician to agree to such a bond plan before the cost gets too high. This would be the end of their career. So instead, the Germans use the crisis to push their own agenda of austerity and they will wait for a major bank run before they agree to a bond purchase plan. The result will most likely be greater financial hardship for many people in Europe than would be necessary, and even some risk that events could spiral beyond the zone of repair. If they are going to buy bonds better to do it now. But, they lack the little courage.
I will point out that I believe that the modern idea that wealth can be created and the middle class preserved (when wages are too high to be globally competitive) though the creation of debt is insane. The fact that it has worked since WWII does NOT prove its sanity. It worked for a while when the US ran the world, and worked a while longer when other countries picked up the idea of preventing recessions through low interest rates and deficient financing. The better path would be to inform the people of the developed world that their collective living standard is far, far too high relative to their productivity and that governments will cease lying to them that they are able to maintain living standards through government-induced cheap debt. But, they lack the big courage.
Do I think the European leaders get this idea? I doubt it. They appear mainly lost in their hopeless task of pleasing both the population and their rich sponsors. This is why their efforts seem so pathetic. They know what they must do by their own standards, yet have trouble achieving it. This is why they appear to act like clowns. This is their lack of the small courage. Further, even it they achieve it, and finally buy their own bonds, they will have accomplished little, and understood less. As the real issue is the insanity of trying to maintain living standards through borrowing (whether by governments, banks or anyone else). But no one wants to hear about this, and the politicians there will not dare to talk about it. This is their lack of the big courage.
Thank you. Bill
European Impact On U.S. Equities Is Overstated [View article]
Of course the leaders of Europe and the US are generally well-educated, often comprising lawyers in the US and technocrats, including those with engineering degrees, in Europe. But a degree from a law school or from the Ecole Polytechnique does not guarantee any useful understanding of what must be done—as what must be done is to exercise massive courage. Of course, I know that this is often easier to recommend to others, than to exercise oneself.
To paraphrase Disraeli, the task of a politician in a capitalist democracy is to do what the rich people want in a way that is acceptable to everyone. In other words, modern politicians serve the upper class (their financial contributors through election contributions, and providers of such benefits as the speech circuit, board memberships and the revolving door) but they must also get elected, which requires pleasing the voters and the political activists in their own parties. This system has its merits as it sometimes works well (and sometimes not) in balancing the large financial interests against the general population needs. Besides, no one has found a better system.
The crisis in Europe seems relativity straight forward. Many banks, especially the French banks, are insolvent due to their ownership of shaky sovereign bonds. The French would like the Germans to bail out the banks through some European vehicle that would purchase bonds. The Germans are ambivalent about the idea. The courageous thing to do would be for a German politician to agree to such a bond plan before the cost gets too high. This would be the end of their career. So instead, the Germans use the crisis to push their own agenda of austerity and they will wait for a major bank run before they agree to a bond purchase plan. The result will most likely be greater financial hardship for many people in Europe than would be necessary, and even some risk that events could spiral beyond the zone of repair. My idea is that if they are going to buy bonds better to do it now. But, they lack the little courage.
I will point out that I believe that the modern idea that wealth can be created and the middle class preserved (when wages are too high to be globally competitive) though the creation of debt is insane. The fact that it has worked since WWII does NOT prove its sanity. It worked for a while when the US ran the world, and worked a while longer when other countries picked up the idea of preventing recessions through low interest rates and deficient financing. The better path would be to inform the people of the developed world that their collective living standard is far, far too high relative to their productivity and that governments will cease lying to them that they are able to maintain living standards through government-induced cheap debt. But, they lack the big courage.
Do I think the European leaders get this idea? I doubt it. They appear mainly lost in their hopeless task of pleasing both the population and their rich sponsors. This is why their efforts seem so pathetic. They know what they must do by their own standards, yet have trouble achieving it. This is why they appear to act like clowns. This is their lack of the small courage. Further, even it they achieve it, and finally buy their own bonds, they will have accomplished little, and understood less. As the real issue is the insanity of trying to maintain living standards through borrowing (whether by governments, banks or anyone else). But no one wants to hear about this, and the politicians there will not dare to talk about it. This is their lack of the big courage.
Thank you. Bill
Sovereign Equivalent Of A 'Friendly' Takeover? [View article]
Watching the Euro-zone news lately reminds me of days of hyped buildup to the Super Bowl. But in this game there is only one team. The fans are cheering or booing the team as they run around trying to find the goal line. The problem is that the team consists of the political equivalent of Elmer Fudd, the Three Stooges, and the Keystone Cops. The frustrated US is sending in plays from the sidelines, “use the quarter-buck sneak—buy your own bonds”. I suppose eventually even this Euro team can figure out that it is supposed to scold Italy, Spain, Greece and all, for borrowing too much, and therefore earn the right for Europe as a whole to borrow more. Sure, it’s exciting to see the world go deeper into debt in order to solve its borrowing problems. And it’s great practice for the ultimate super debt bowl, when either Japan or the US compete to see which super bond borrower can bring down the world financial order and bring the gold (err, not gold, maybe brass) medal home. Thank you. Bill
If Things Are So Bad, Why Is The Market Going Up? [View article]
We have maintained our living standard globally for many decades by stimulating debt creation, and increasingly and desperately by sovereign borrowing. The jig is up. What would you think of a relative that planned to pay off his debts, but was running up his credit card each month? And yet almost every major government in the world does just that and then goes out to the market to auction its new debt. A major bond crisis (one of many symptoms of the global debt crisis) is close to inevitable, as it is the last stage in the bad debt shell game. By the way, my own guess as to the real living standard absent the debt pump up is about 60%. If I were right, that would mean a global fall in living standards of 40%. We could see an uptick in social unrest or even war.
The only two exciting questions for me in the markets right now are: 1) which government will have its bond crisis first, and 2) will the US trigger hyper-inflation with its bond buying programs?
Thank you. Bill
Global Financial Disaster Looms: European Banks Face Bankruptcy [View article]
To me the details of the European crisis have lost importance. Is there really any question that a continent that has incurred too much debt will borrow more to buy more time given any chance to do so? Would my brother-in-law Bob finally max out his last credit card for one last trip to Las Vegas? There is little drama here. The only real issue is the arm wrestling between Germany and France as to who should bail out the French banks—a European entity (i.e. mainly Germany) or local governments (i.e. France). And of course, there are a few very scary scenarios where the French and Germans wait too long while Humpty Dumpty falls off the wall, and finally the possibility that institutions and governments in Europe have miscalculated or even hidden the true costs of all of this.
What seems more significant to me is that another Great Depression is now just over the horizon. The crisis in Europe is just the latest bubbling volcano reflecting the massive magna of bad debt flowing through the world financial system. The particular eruptions of debt problems—Mexio, South America, South East Asia, Japan, the US and now Europe—are all part of the same hot money flow. Easy credit lifted living standards and asset values for far longer than we realized, but the economies of Japan, the US and Europe do not have enough real productive economic activity to support the asset values or pay off the debts incurred. The last stage—replacing bad bank debt with sovereign debt has played out over the last 15 years and now has reached the final act, as now both sovereign debts as well as the bank debt are suspect.
In a nutshell, major governments around the world are bankrupt. They have limited tax income, and mounting operating and debt obligations that they can not pay. Their expenses are rising as they try and stave off social unrest and attempt to support failed borrowers and lenders. Even at the present low interest rates in many countries (or example, the US and Japan) the sovereign debts can clearly not be repaid. Any jump in sovereign bond interest rates speeds up the end game.
What does it mean to have the major governments unable to pay their debts and bills? I would guess a massive drop in living standards. Nobody knows how much longer the shell game can go on—a year? Less? True, life goes on in the markets, even in a depression, but probably not at the stock price levels we have now.
And now for the last question every investor must now try and answer. Will the behavior of the EU, England, the US and Japan result in the typical deflation of a depression, or will the electronic printing of money involved in countries buying their own bonds result in hyper-inflation?
James, what do you think? Thanks. Bill