Lawrence J. Kramer

Why Do Equity Markets Disagree with the Data?

People are rebuilding their savings. They have to put the money SOMEWHERE. Look at how expensive Treasuries are despite a trillion dollar deficit.

We have inflation in financial instruments - too much money chasing too little paper. So everything "goes up," and stays up until supply catches up. But supply won't catch up; no one wants to issue paper when no one will buy the goods the issuer would use the proceeds to produce. (When else has a bull market produced so little IPO activity?)

Why Our Credit Crunch Mirrors the Weimar Hyperinflation from 1919-1923

I think the numbered paragraphs are excellent and important, but much of the preamble is paranoid nonsense. There has been no transfer of wealth. The bankers who have been "helped" have seen their personal fortunes decimated. All they have left are their jobs. That puts them ahead of a lot of people, but "transfer of wealth"? Ask Hank Greenberg or Dick Fuld or Lloyd Blankfein or Jamie Dimon how much wealth has been transferred to them. Short-sellers have cleaned up, but not on bail-out money. Everyone else has been beaten up pretty badly.

None of this makes the historical lessons of Weimar inapposite. It's just sad to see the matter wrapped in the sort of conspiratorial silliness that makes people stop reading before they get to the stuff that matters.

Stripped of unimportant talk about what motivates individual actors, the material problem is that we bought more than we could pay for and now have to default on our bills. We have to. There is no choice, as we don't have anything to sell to pay what we owe. We tried pretending that our real estate was worth more than it is, but that didn't work. Dollar-denominated obligations will be settled at less than par in real terms because there isn't enough of value to settle them in full. Inflation is merely the mechanism by which that default occurs naturally.

If there were no stimulus, no "runaway spending," the trade deficit would still be there, and the debts would still be coming due and we would not be able to pay them except by printing dollars. Without the stimulus, though, the Chinese and OPEC would simply stop taking our dollars sooner, as they would have less business to lose. They wil continue to supply us for so long as they can pretend they are getting paid. If we don't buy, the music stops now. If we do buy, it stops later. In the scheme of things, there's not much difference.

Our standard of living has long been subsidized by the poverty of others. That may or may not have to be the case, but foreign suppliers seem no more eager to elevate their workers and consumers than we are to demand that they do so. In a globalized world, the economies of the U.S. and India should be as much alike as those of New York and Iowa - different, but not very different. Is there enough productive capacity for that to be the case? If yes, can we get there? If the answer - to either question - is "no," then what? I mean, if our hyperinflated currency won't employ those call centers, what will?

Fears on Gold: Declining Supply, Increasing Demand

My problem with gold as an investment is that gold is intrinsically worthless - there is very little demand for it to make things that people need. The use of gold as a store of value, however long-standing the practice may be, is wholly arbitrary. Anyone can decline gold as a medium of exhange at any time. If things really get bad, I expect that the currency of choice will be the bullet.

Gold Is the Only Long Term Bull Market

Only bull market, or only unpopped bubble?

I'm wondering what effect the GLD ETF is having or will have on the price of the metal. I'm not sure what the difference is between GLD shares and gold-backed currency (the ETF is backed by physical purchases as far as I know). Doesn't Gresham have something to say about this? Is there any reason why gold must remain a means of exchange jsut because it has always been one?

Evidence That Big Inflation Is Coming

The problem with this analysis is that it does not account for the wealth effect and its doppelganger the paradox of thrift. When wealth has been destroyed, people do not spend their incomes as freely as when they feel flush. Rather, newly printed money comes to rest in the investment markets to buy stocks and bonds for savers who lost what they think of as "money" in the crash, in effect putting us right back where we were before except that the money will have moved from the old savers (our trading partners, mostly) to new ones (people with jobs). (This is a good thing. What else were we going to do about the accumulated trade deficit? We had to default on it somehow, and this is what we came up with. I was expecting we'd inflate our way out of it, but instead we destroyed the assets in which it was invested. Brilliant.)

Inflation may be coming, but only AFTER the wealth has been replenished in nominal terms, people are no longer underwater on their mortgages by reason of equity loss, and the stimulus keeps coming because turning it off too early replays 1937. But I think that day's a ways off.

Gold is till a good near-term play, though, because thanks to GLD, the public can effectively "corner" the physical market. GLD is gold-backed currency, and Gresham tells us that people will hoard it, putting tremendous upward pressure on the price of the physical metal.

Gold Shares ETF Inventory Reaches 800 Tonnes

Nice try, guys, but fiat money is how a stable and powerful nation monetizes its stability and power. If the world used only specie-backed currency, our currency would only be as credible as Biafra's. On what planet would be good for us?

And my whole point is that gold has BECOME too easy a savings account. I want the dollar savings account to have an advantage; those dollars get recycled here into mortgages. Dollars paid for physical gold get recycled in South Africa.

They've moved the pins on the economic bowling alley. Rolling the ball in the same old way over the same old spots will not produce a very good score.

Gold Shares ETF Inventory Reaches 800 Tonnes

GLD threatens to undermine gold as a store of value. One reason gold has been a good store of value is that the logisitical obstacles to making sizeable investments in the pysical metal have limited the swings in demand. GLD changes all that.

Hoarding of physical gold by investors through GLD is too easy for our collective good. I expect that it will be made illegal by law and treaty as soon as the next bubble happens and trading in GLD is identified as a major contributor.

Inflation Is in Our Future...Not Deflation

Does the headline of this article match the substance?

Dow Will Equal Gold in 2009

It may not be accurate to say that printing dollars will kill the dollar so much as bury it. The accumulated trade deficit has already put too many dollars in foreign hands for us to redeem with value. We tried pretending our residential real estate was sufficient to the task, but that lie has been exposed. So the problem is not that we will have to default on the growing Federal debt but that growing the Federal debt is HOW we default on the unsustainable trade debt. The dollar is like Wile E. Coyote chasing Road Runner (a great accidental metaphor for imported fuel) off the cliff; the only reason it hasn't fallen is that it hasn't looked down.

The American Crisis and the Case for an Inflationary Depression

"The recent economic collapse can be traced to Alan Greenspan's extremely dovish interest rate policies in the 1990s, which led to artificially strong growth in America's economy."

Not hardly. The collapse can be traced to the trade deficit, exacerbated by the oil bubble. With all those dollars looking for a home, we had to pretend there was value here for them to buy. So we said that homes were worth what people paid for them, even though they paid with liars' loans. Then, the AAA paper backeed by the stupid loans proved not to be AAA after all. Duh. That seized up the credit markets, and it has nothing to do with artificially low interest rates. (The flood of petrodollars looking for dollar investments guaranteed that rates would be low, whatever the Fed did.)

Bailouts Will Soon Drive the Currency Markets

What is the monetary implication of the trillions of dollars lost on dollar-denominated paper (stocks and bonds) in the past few weeks? Don't the Treasury's new borrowings have to be netted against the "money" destroyed? After all, we can't have too much money chasing too few goods if none of us has any money or inclination to spend it.

The dollar may be damaged by the discovery that the Reward Points we have been distributing to our trading partners cannot be redeemed for anything worth having, but that's not a result of the Treasury printing money so much as it is the result of exporters grasping that they will not in fact get paid for what they send us. (Of course, taking into account the low marginal cost of selling stuff to us, that risk may actually prove acceptable to them...)

On Oct 15 02:30 PM Pipo wrote:

> Jim Rogers is also worried abaout massive inflation going forward.
> Commodities will excel.
>
> Visit his blog at jimrogers-investments....

Bailouts Will Soon Drive the Currency Markets

Actually, I do have an ounce of gold in my safe. One, a gift to my son from his grandfather the gold bug. I don't se the point of owning physical bullion in physical possession. By the time that is worth more than shares in a gold ETF, the currency of choice will be bullets.



On Oct 15 01:46 PM User 30121 wrote:

> Kelly, you tried. remarkl just doesn't get it. Granted, he/she has
> faith in the system, and we "should" have that, but let's face it,
> if you buy a dog for protection, and at every opportunity to excel
> in his job to protect you, he BITES YOU, what should you think/do?
>
>
> I bet he hasn't a ounce of gold or silver in his safe! Those paper
> promises, oh well, I'm not going to beat that (very) dead horse!
>
>
> Love your posts, Kelly. Of course, you know that!

Bailouts Will Soon Drive the Currency Markets

Kelly -

When I say "if," I don't mean "when." I have a passle of TWM, SDS, GLD, and SLV that says I don't disagree with your prediction.

I do not agree, however, that the "fools that created this mess" are on Wall St or K Street. My first domino is the trade deficit. Given Jimmy Carter's failed attempt to wake us up from our addiction to oil, I believe that the relevant fools can be found in our bathroom mirrors. All of the mistakes of all of the subsequent fools were largely irrelevant to the big picture. Those latter fools determined which card would be pulled out of the house to trigger the collapse, but we built the house. But even if Government did not make this mess, Government may be the only one that can fix it, and pessimism about the ability of Government to get it right is certainly not without historical support.


On Oct 15 09:29 AM Kelly Lieberman wrote:

> Remarkl,
> If,If, If....I feel bad to be the one to tell you, so just reread
> your own post. The dominos are already falling and there is no way
> that the fools that created this mess are smart enough to get us
> out of it.
> It is really just that simple. You have two choices, the first is
> to put your full faith and credit (literally) in the hands of the
> criminals who created this mess or self preservation. You choose.
> There is not much time left.

Moral Hazard: The Real Culprit of the Financial Crisis

Nice try, but no cigar.

Moral hazard is an enabling condition, perhaps, but the immediate culprit is the ratings agencies who had no skin in the game: having no risk to be insured, they had no moral hazard in their decision-making process.

But the immediate cuprit is usually just the weak link in a chain that has come under tension; the tension on the chain that is the "real cause" of the crisis. In our case, the tension was the trade deficit. The deficit made it necessary for us to provide a home for the dollars we spent on imports. Where else were they going to go to make them worth having? We had to borrow them, but Pres. Clinton balanced the budget, leaving the private market to supply the paper. The rest is history. Even the burgeoning Iraq-based deficit could not keep up with the inflow of money. Only by lying about the value of collateral could we accommodate the deluge of petrodollars. So we lied. What else could we do? Conserve energy? Use natgas or nuclear energy? C'mon, this is America!