walleke

If U.S. Stopped Issuing Treasuries, Would It Go Broke?

I am reminded of the New Yorker cartoon that shows two men in a basement looking at the first counterfeit bills coming off their press. The caption reads "Boy, is the local economy ever going to get a stimulus!". Of course, it is the counterfeiters own personal economy that gets the biggest stimulus. The merchants they buy from get second dibs and so forth. If you are an honest worker not selling to the counterfeiters then you will be outbid for local goods. You lose your purchasing power from inflation. The honest worker is the victim of the counterfeiters. It is not a victimless crime.

The fact that fiat money is legal tender does not detract from the fact that is counterfeit money. The beneficiaries are those closest to the creation of the money and the victims are those furthest from it.

It is not true that government cannot default on debt issued in its own fiat currency. It is true that the government need not default or cannot be forced into default. But it can default - and will default - if it views the domestic political consequences of default as less than the political consequences of displacing the cost onto foreign (or domestic) creditors. Probably, the USG will never default. It will take the path of least resistance. However, the recent book by Reinhart and Rogoff "This Time Is Different" (the title is sarcastic) show that default is more common than commonly believed. The siblings of default are inflation and currency devaluation - the coward's default.

The whole system is exactly what you know in your heart it to be: An unsustainable financial scam. The only ones who defend it are those who sit close to it.

It is disheartening that intelligent people are fooled by sophistry invoking the complex machinations of the Federal Reseve System. The perfect crime is discovered when the counterfeiters realize that noone will ever catch them if instead of buying cars, clothes, and carats with their money they use it only to loan at interest. It literally took centuries for bankers to devise a system so complicated that people instinctively wince and turn away when confronted with a (in J. Edgar Hoover's words) "conspriacy so monstrous you dare not believe it".

If Housing Were Priced in Gold

It is the hobgoblin of practical minds that they perceive the value of gold only in terms of industry. Gold has many industrial uses but it is not used because it is too rare and too valuable to be wasted.

The value of gold is as a reserve of currency. Gold does not make a particularly good currency because it is too soft and would wear away quickly. Reserving currency in gold acts as a discipline on national and government spending. Governments do not like the gold standard since it prevents spending on favored political classes and causes - especially war!

Some argue in favor of gold as a kind of salvation against Mad Max end-of-the-world fantasies. Gold has no such value.

Neither gold nor homes are investments. Both are examples of "wealth". Art and relics are other examples of wealth. If you do not see the value of art and relics then you are an animal.

Gold has value because historically and culturally it confers status. Status determines which males have access to which females. The king sits on a throne of gold and wears a crown of gold. The alpha male wears a Rolex, not a Timex. Mankind may perish quickly if all the bread disappeared, but man cannot live by bread alone!

Economic Donkeys

Many of the problems are cause by a failure of corporate governance. Too often the CEO and chairman of the board of directors are one and the same person. The board is appointed and controlled by management. I believe it is contrary to fiducial responcibility to allow any member of management on the board.

A board of directors should be adversarial to management. An adversarial board would not permit excessive pay - endemic across industries not just finance - and would not permit excessive risk. They would be our best regulators.

Warnings to Precious Metal ETF Investors - Buyer Beware!

zero hedge + project mayhem = Tyler Durden
Mark Anthony is a collaborator with Tyler Durden?

What's with all the Fight Club references?

On Social Security's $700,000 Resort Meeting and Our Future

"His idea of speeding the stimulus up was to build more military vehicles and ship them to Iraq. "

This sentence would make a fitting epitaph on the gravestone of the dollar.

Winter's Coming for the Boomers: Part 1

The only historical cycles I see are the Earth rotating on its axis, the Earth orbiting the sun, and the moon orbiting the Earth. The western world gave up on circular time with Isaac Newton. Now we know the cycles are in space, not time. Circular time is for pre-scientific societies.

A human life is not 80-100 years except presently in this era of geriatric medicine. Most animals die shortly after reproduction. Human beings are different because we don't have litters and are born largely undeveloped compared to other apes and mammals, and therefore require much nurturing. We therefore evolved to live long enough to care for our children until they have children. The natural human lifespan is 40-60 years.

It is good to have an open mind, but do not confuse open with gullible. It is equally good to be a critical thinker. I know enough science and enough history to know that there can be no theory of history.

The End of Asset Allocation

A related idea concerns efficiency of markets and index funds. In an efficient market you "get what you pay for". Efficiency of markets depends on independent rational investors. When there are many such investors the market is efficient. A few can piggyback on an efficient market by buying index funds, ETFs and the like. This gives diversification at low cost. But index funds are not independent rational investors. As more and more people invest in index funds the market becomes less efficient, and the rationale for index funds disappears.

Budget Busting Pensions Must Be Reined In

Two errata in my above post. ERISA is the Employees Retirement Income Secuity Act. Also pensions are no "unfunded", they are "underfunded".

Thank you Kurt Brouwer for the great article.

Budget Busting Pensions Must Be Reined In

Many private sector plans are in no better shape. ERISA (Employees Retirement Security Act) guaranteed proper funding by requiring companies to compute compute unfunded liabilities using consulting actuaries. Companies were not allowed to let unfunded liabilities grow and were supposed to bring them to zero by making contributions to the plan.

Unfunded liability is the difference between the assets of the plan and the present value of future benefits. The latter number can be made almost anything by fiddling with assumptions on future interest rates, investment results, and employee turnover. Companies and governments do not like to make contributions since it cuts into earnings or money they could spend immediately. Thus, every pension scheme from social security to, well, everything is unfunded.

It's a mess. My opinion is the only fair thing to do is to dissolve the plans and return (actuarially pro-rated) the assets to the present and future beneficiaries. That way, people at least know where they really stand and will prevent bankrupt institutions from multiplying and creating social turmoil.

I worked for a small pension consulting firm thirty years ago when I was in college. (I am an engineer today.) I was horrified when I saw how many managers would have their salaries multiplied 3 to 5 times the last five years of their employment so they could receive bloated pensions. This is probably what the treasurer from Vernon did.

This mess brought to you from the aspirin companies of America.

Fiscal Policy: What's the Null Hypothesis?

You've got it exactly backwards Mr. Thoma. We have been stimulating the economy for decades. Picture a cow walking down the road. Impatient for the cow to move faster we give it a "stimulus" with an electric prod. At first the cow hustles. But after the fiftieth prod the old cow is ready to drop dead.

What's the difference between a liberal and a conservative? A liberal thinks you can balance the budget by increasing spending, and a conservative thinks you can balance the budget by decreasing taxes.

How Much Gold DO You Need?

After the U.S. invaded Afghanistan and deposed the Taliban, the Afghan currency collapsed. A new currency was created. It is backed by 200 tons of gold deposited in a Swiss bank. A German company printed the notes. After all that has gone wrong there, there is one unqualified success. The new currency continues in use and is accepted by all parties from warlords to opium traders to militants to everyone else.

I believe gold will go up in value because demand is increasing. Investment demand is surging, and this will continue until European and U.S. central banks say "Uncle!" and begin to purchase gold and contemplate a return to the gold standard. In the meantime, Asian banks (including Russia) will want gold. Put yourself in their shoes.

At present, the price of gold is kept unnaturally low by the manipulations of central banks by means of short selling through the money center banks. It is possible to manipulate a market, but it is not possible to manipulate a market and make a profit! Compare, say, to China manipulating the market for its currency (keeping its value low). Today, China has a trillion dollars and grief. They wish they had gold.

People misunderstand the utility of gold. They think because it has little industrial application it as little utility. Gold is too valuable to be used in industry. Its utility is to confer status and to back money. Status is more than a conceit. It is a human need shortly behind food, water, and air. Gold can back money because it has the correct physical, chemical and (yes) cultural properties. No other substance comes close.

We are not having the great depression or great recession. We are having the first tremors before the volcano of a financial crisis blows up. This does not mean the end of the world. It does not mean you need canned goods or guns. The sun will still shine, the crops will still grow, the high-speed dentist's drill will still whir.

If you want diversification, try silver.

If you want to know who is to blame for the crisis, first look at the suburban sprawl which is what we bought with the great debt. Second, consider that there hasn't been a year without American troops fighting wars since Jimmy Carter, and then not since Herbert Hoover. Then look in the mirror.

This is Not a Bull Market: Stocks Are Not Up, and They’re Headed Even Lower

Interest rates will go UP ==> Stocks and bonds will go DOWN. The price/dividend ratio is quite high now and will not be sustained.

Interest rates will go up because:
1. Capital (not dollars) is scarce.
2. Credit worthiness of U.S gov't and population is declining.
3. Either Fed raises rates to "mop up" excess liquididty or inflation ignites.
4. Social Security becomes a net seller of bonds.

Gold may or may not outperform other commodities, but it will maintain a store of value. After interest rates rise - look for 15% mortgages - it will be time to sell gold and buy financial assets.

Those who dislike AU will be given an economics lesson.

Dollar's Purchasing Power Annihilated - The Chart They Don't Want You to See

You never know what might have been. We are certainly better off today than we were 76 years ago. We have modern dentistry - a metaphor for better technology, health care etc. But I think we could have had modern dentistry without debasing the currency. A small inflation may not seem bad but it is a mask that hides the perfidy of government deficit spending. Governments want to direct resource allocation to politically favored projects... and that means war.

I think if we had maintained a gold standard and not debased the currency then the wars of the last 76 years would have been fewer in number, less vicious, and of shorter duration. The "barbarous relic" is really a civilizing influence because it checks government power and maintains financial discipline. But you never know what might have been.

Thoughts on the Current Restructuring of Global Oil Demand

Verrrrry Interrrrresting. The author is bullish on oil. Our great problem is the architecture of our cities which are unnaturally sprawled out due to early gov't interference due to the Interstate Highway System and the Rural Electrifical Project.

Gold: The Long-Run Value

I agree 100% with Mark Joseph. Gold is not an investment. Gold is what is used to make an investment. A good investment is one worth making because you'll have more gold after the investment than before. Shares in a company are a good investment when business is good (or getting better), management is trustworthy and intends to share profits with shareholders, and, of course, the price is right. Bonds are a good investment if the borrower does not default, interest rates are stable or declining, and there is little inflation. If you cannot find a good investment, then gold is a default holding.

The times when money was backed by gold were less barbarous than the times when money was not backed by gold. We have more creature comforts, but hardly more civility. Gold acts as a discipline on national consumption and does not permit the unrestrained spending on armies. The first currency to remove itself from the gold standard was the GBP and was done so precisely so the King of England, who was broke because of civil war, could go to war against France. I believe that was John Law's scheme.

I neither advise nor disadvise owning gold. I have about half my money in gold (GLD) while I patiently await the opportunity of a good investment. I certainly do not recommend gold as a defense against coming armegeddon. The fiat currencies may collapse, but the sun will still shine and the crops will still grow - civilization will not collapse.