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My take: I think they may both be right... Strong dollar short term. This will lower stock and commodities prices. Then the Fed will print up a QE4-xport strategy to try and weaken the dollar and export away our debt to China and the rest of the world.
"export away our debt to China and the rest of the world. "
Hi there Bee-
In trying to analyze possible developments based upon past experiences I don't think that history is going to be very helpful this time around. It is surely true that many various problems and crises having some factors in common with the present mess have occurred historically, and under normal circumstances we might be able to draw reasonable inferences based on that.
But those prior experiences occurred in much simpler economic models. At this time, because of unprecedentedly complex political, financial and monetary interrelationships I don't believe that anyone can begin to predict how this situation will evolve and eventually settle out.
There are just too damned many unpredictable variables involved, and frankly I think that we are seeing a lab experiment that we've lost control over, and that whatever happens will be both unpredictable and probably unstoppable at this point.
I do think that the European Union, financial relationships (both in the developed and developing countries) based upon that union, and in fact our lives are going to be radically changed by whatever happens, at least in the 10-15 year short run. The so-called underdeveloped countries may well emerge with the least overall damage, simply because they have much less to lose, and life goes on.
I also think that anyone who believes that any particular economic sector will emerge unscathed by all of this is being very, very foolish. The financial relational interdependency is just too complex.
I've got to go with Rickards fundamentally but can understand some near term relative strength for the dollar. But think about it. Look around. Do you really feel full faith and confidence in our dollar? Do you really want to get giddy about the prospects for the dollar? Geez, it's like the folks climbing the tallest mast on a sinking ship and who's at the top. duh.
Halving the dollar for export stimulation is an aspect of the great plan.
There are over $100T in unfunded liabilities (i.e. social security, medicare/aid, debt service, various and sundry other trust fund promises and no combination of benefit reduction and tax increases is sufficient to cover them. NFW. Their only possible solution is to monetize as much of it as they can without blowing things up. Estimate is that they need to halve the value of the dollar over the next 10 years to be able to even sniff about paying the UL. And even here, they'll need to really break a lot of promises and default, as it were, on a lot of obligations.
Also, an early prediction by Harry Dent was that we'd be in this austerity until around 2023. I'm not a convert and disagree with much of what he says, but this feels pretty sound.
In the linked article, Jakobsen is writing about the euro vs. the dollar, not the dollar vs. other currencies. I agree with him on that count, for, say, the mid-term, at least.
Any financial panic sends people running to U.S. Treasuries, and it doesn't seem to matter how low the yield is - it's a flight to safety. I don't see how we avoid another major scenario of that kind in the next 6 months or so.
Look at what's happening to Asian and EM currencies right now - local currency debt funds are getting slaughtered short term.
I'm always very impressed by your thoughtful comments. I don't have any inkling over the direction that the dollar will take, but I'm always puzzled about the economics behind the thinking of the gold bugs, and about several of your statements above.
"Do you really feel full faith and confidence in our dollar?" --Considering how low interest rates are on US bonds, I guess I'm just amazed at how amazingly strong confidence is in the US dollar. Global markets are buying into both USD bonds and gold because they're seen as safe hedges, aren't they? Gold is rising against all currencies, isn't it?
"There are over $100T in unfunded liabilities . . . " --As the US is the issuer of its own sovereign currency, it doesn't "fund" its expenditures, does it? The US government can spend any amount of money that it wants, in reality. Unlike countries in the Eurozone, where individual member states do not control currency issuance, the US does not need to issue bonds in order to spend.
". . . Their only possible solution is to monetize as much of it as they can without blowing things up." --A country can't "monetize" its debt if it's not on a gold/silver standard, can it? I know that there are a lot of pundits who write as if we still were, and they also talk about "devaluing" the exchange rate. How is it helpful to pretend that we don't have a fiat currency and floating exchange rates?
". . . they'll need to really break a lot of promises and default, as it were, on a lot of obligations. " --As US bonds are all denominated in US dollars and not in foreign currencies or in gold certificates, why would the US government ever choose to default, i.e., stop paying interest on its bonds or refusing to redeem them when they're due? The US government is unconstrained in its ability to issue US dollars; it doesn't need to have any gold in order to do so. The only way the US could ever default would be if Congress voted to stop honoring US bonds.
"For you and Washington to say that the US can expand the currency without regard to fundamentals (the result of inflation or even hyperinflation), is without precedent in the history of currency." --Well, I certainly did not say that, and I'm not aware of anyone in DC who would say anything like that. I fully agree that aggressive expansion of money supply during boom times will lead to inflation. As you point out, the Fed must look at the relevant fundamentals when carrying out monetary policy.
"You state that the US government doesn't fund its own expenditures. Well last I heard, despite Congressional disagreements, the US government still has an official budget every year. Based on your comment, why do they even need to put forward any effort?" --As we know, government spending is a component of demand. Large government deficits during times of prosperity will lead to higher than normal inflation. There may even be times when it's prudent for the government to run a surplus. (Fundamentals matter, both for fiscal and monetary policy.) This doesn't change the fact that government spending does not need to be "funded".
"While I agree that you cannot pretend that our currency is fixed to gold, that does not excuse the unprecedented expansion of our currency." --You're seem to be claiming that US money supply is inexcusably large. Don't we need an objective criterion for judging what constitutes appropriate expansion? I guess I'd agree with your judgement that money supply is currently too large if I saw that the economy was heating up. That's clearly not the case.
" . . . by keeping interest rates below where the markets would price them, they are already breaking promises to owners of Treasuries in terms of yield. " --I agree that bond-holders and cash-holders are losing out after inflation, and are with you and Rono about that. (I didn't understand that's what Rono meant when he used the word "default".) Effectively, we bond and cash holders are all being taxed in order to subsidize the big lenders and keep them afloat. As much as that outcome makes me mad, I can't agree that the government has ever promised us that Treasuries would yield a real return after inflation. Caveat emptor.
"" . . . by keeping interest rates below where the markets would price them, they are already breaking promises to owners of Treasuries in terms of yield. " --I agree that bond-holders and cash-holders are losing out after inflation, and are with you and Rono about that. (I didn't understand that's what Rono meant when he used the word "default".) Effectively, we bond and cash holders are all being taxed in order to subsidize the big lenders and keep them afloat. As much as that outcome makes me mad, I can't agree that the government has ever promised us that Treasuries would yield a real return after inflation."
A few thoughts about this.........
In terms of any promise about Treasury rates; one need only rely upon the perception of the market place as to value. In the case of U.S. Treasury issues, it is indeed a fact that the Fed is involved with "false" rates at this time. On the other hand, the Euro Central Bank has reportedly been buying Euro area bonds by the boat load and this has had little impact upon yields flying to the sky for many countries in Europe.
Bond holders do not necessarily lose any money, but may indeed profit from continued lower yields; as the money is to be made with the increased value of the bonds. I don't care that the 10 year yield was 3.5% a year ago and is now under 2%, and would in no fashion be a possible match for inflation. However, the price one paid for IEF a year ago and the increase in value (+ 12% YTD, per M*) is the real counting point for holding this etf. When yields start to flip in a more permanent fashion to the higher side; then one must be paying attention to the value of the bonds beginning to fall. With a gradual increase in yields, many bond fund holders may not find any special impact upon the value of their holdings.........if, the fund managers are able to rotate the fund's bond holdings properly to take advantage of higher yielding, newly issued bonds.
If any bond type did indeed stay flat in yield for any length of time; then one should be more concerned about only earning a 2% yield.
As to cash holders, CD's, MM's and related. Yes, low rates cause problems with attempting to earn any positive monies in these areas with low yields reflected from the Treasury sector. Another negative impact for this same area is that the IRS/Treasury loses tax revenue from these same accounts; as the holders have very low earnings to report and be taxed.
All of this creates very complex and intertwined circles of pain and pleasure; dependent upon where one's monies are parked at or for a given period of time.
Short term is anyone's guess. Every time a little panic sets in, folks rush to the dollar. Long term, unless Washington really gets its act together (probably not until after the 2012 election), the dollar looks weak to me. That may be inevitable anyway, given the current level that seems way overvalued. It's a guessing game for sure, and that's why we hire Hasenstab, Finkelstein, Fuss & Gaffney, Kaufman, Pell & Quigley, Rieder, and Venezia & Cirami. They are a whole lot smarter than I.
Right now the dollar is the least smelly fish around.
Sure, we can print dollars 24/7/365 like we've been doing, but sooner or later, the 'full faith and confidence' starts to erode. Since 1913, the dollar has lost 96% of its value. In 1960, little rono could go to the store with a quarter and buy a loaf of bread. That same silver quarter is now worth $6-7 in melt value - or a loaf of bread or two. An ounce of gold would buy a nice toga and sandals back in Rome, a nice suit of clothes during our Roaring 20's and today at $1700. Lastly, we used to have 5&10, or Dime stores. Today we have Dollar stores.
Monetization is basically printing money to pay your debts. Let's say I owe you $100K and go to my basement and print off 1000 $100 rono bills and pay you off. Are you happy? Sure, if you can in turn spend those rono bills and receive full value. What if you can't? Having our dollar and bonds be the least smelly fish in the bucket doesn't enspire my confidence.
As for defaulting, it's how and when and to whom. A reduction in Social Security benefits is a default - a broken promise, as it were. Or, if I pay you with rono money is that a default?
Hell, just them fixing the CPI is a a default. Real inflation is running around 10%, but the CPI has it around 1-2%. Check the formula coach. shadowstats.com.
Oh and artificially low rates are resulting in a lack of lending. Price control d/s curves from Econ 101. You impose artificially low prices on anything (including loans) and supply disappears. duh.
Enjoyed your description of the dollar as the least smelly fish around! There's a lot of truth to that. However, I just don't see why you see the dollar as a fundamentally sinking ship. As long as we're pursuing deflationary fiscal policies (i.e., government spending being less than the shortfall in investment and consumer spending), why do you think the dollar would weaken?
I understand now that you're using "monetization" as another way of saying inflation. We all have a gut feeling that higher prices must always be bad. However, I think my perspective might be a little different: We know that all currencies have experienced inflation almost every year. And we know that even the most conservative central bankers (like the Germans) think that slow but steady inflation of at least 2% is helpful for keeping the economy rolling along. So, isn't the crucial objective to keep REAL incomes rising faster than inflation in the long term? After all, real incomes have risen much faster than inflation over the past century, haven't they? I guess my key question would be: are you saying that it would be better to have zero inflation, even if we had no growth in real wealth? I know that sounds like a leading question, but I don't mean it that way. What I mean is: If some low inflation is the grease that keeps the machine running at a faster speed, isn't that a price that's well paid? If we're richer AFTER inflation, what's wrong with that?
I fully agree that there will be a lot of pressure on politicians to find stealthy ways to cut Social Security, Medicare, education, veterans' benefits and other core social services! There's no doubt that some cuts to the growth in social benefits is going to happen, is there.
(As for Shadowstats . . . Aren't we in Wonderland there, where it's: First the verdict, then the trial?)
Your last point about interest rates is really interesting and I'd like to understand that better. I'm wondering whether you mean that if interest rates were higher, banks would be lending more? An interesting hypothesis.
The books will tell you that in an ideal world of monetary policy, inflation would be kept equal to the rate of growth in the economy. That said, it's hardly ever been the case, in this country since 1913, but everywhere else where there were no constraints upon excessive growth in the money supply. And, that's perhaps the real problem. Politicians want to spend more than they want to tax. It's easy to get reelected after you've brough lots of gov't $ to the locals and haven't had to raise their taxes. It's easy to have a war to end all wars and keep the expenditures 'off budget.' feh. You just print more money and if they won't buy your bonds at the artificially low rate you're insisting upon, well, then damnit, we'll buy them ourselves. Man, do you have any idea how much of the bond auction goes to 'other'?
Nopers, our problem is our gov't as it stands today. They've made way too many promises that they have no way of keeping. Hell, at this stage, they can't even agree on the day of the week, leave alone prudent fiscal policies.
As for the statistics, I like Williams approach to the gov't statistics. Why not do them as they're done today but also calculate them as they were during Reagan's admin. ah.
I'm sure that you're a shopper and realize that we're getting killed on food, energy and health care. Yeah, flat screen TV's and IPads are cheaper every day, but how many do you or I need? You've got the internet and globalism keeping prices down on consumer electronics and whatnot, but we're still getting killed with inflation. Ever ask yourself why? It's the bloody formula and make up of the market basket. Fully half of the basket is subject to hedonic adjustments. Yeah, I know. If a product or service is 'new and improved', you can charge more and it doesn't count. Sounds good. However, it's only so, IFF I can still buy the old and unimproved product or service. Cripes, Big Al said a few years back that if steak got too expensive, they could buy hamburger - and it shouldn't count as inflationary.
Unemployment? er, if you run out of benefits, and you don't continue to report, they start counting you as employed. How about discouraged and not reporting? How about underemployed? feh. Real unemployment is over 20 gd%. The misery index is over 30.
Oh, and if you make corrections to the inflation figures, it impacts GDP and results in NO growth since the dot.com meltdown.
Lastly, about interest rates and the credit market. The rate is interest is the price of money. It's what you have to pay to get money. Ergo, the credit market is not unlike any other market with supply and demand. Now, what we've been seeing for several years now is the Fed effectively setting interest rates at zero in order to help stimulate the economy. Sounds good. BUT, if their rate setting means that mortgages are going to be at 4%, and I'm a banker who feels that I need at least 6% on a 30 year note to cover future uncertainty - or a banker who simply feels that 4% is too gd low . . . Oooops. So sorry, we're fresh out of available funds to lend. We've got stress tests and all and besides, you once stiffed a waitress.
Are you old enough to remember Nixon in the '70s when he put price controls on gasoline? All of a sudden, every one was out. A couple of years ago, the paper price of gold and silver was driven down by short sellers so low that supply dried up. Potential sellers decided that the paper price was below what they felt was fair value.
In Econ 101, during the study of demand/supply curves, if you impose an artificial price below market equilibrium, supply disappears. This is what has happened to the credit market and why so few banks are making loans. Why on earth should I loan you money at a rate below what I feel is fair?
What as exacerbated the problem is Europe and their problems and how so many folks looking for a safe haven have turned to the dollar. It's helping to keep market prices low on our bonds.
Sure it matters. The easy money policies coupled with either nil interest or too much risk, leaves few investment options that are attractive from a yield perspective. Hell, it's always searching for yield, but right now, dividend paying stocks are the sweet spot to overweight.
You are oversimplifying strong vs weak dollar or strong euro vs weak euro or strong dollar vs weak euro etc etc What you may invest in today can change more quickly than you can. Your example could apply to any day of the year. Dividend paying stocks are always a good decision but investing in europe or emerging markets is not in the short term but is in the long term. Do you only invest in a mutual fund that pays dividends, if not why?
I agree with you that monetary policy is very, very loose right now and that this is very painful for people who rely on bond income. It hurts all the more when inflation is higher that bond interest rates. (Reagan famously said: "Inflation is the cruelest tax.") Nevertheless, the alternative of depression is less palatable. Without much more aggressive fiscal stimulus--which would be a far more desirable option right now and which would lead to the Fed backing off its super-low interest rates--depression would be the result. As Bernanke has said all along, the Fed is only pursuing it monetary policy because Congress is not stepping up to the plate and doing what it needs to do to get the economy growing.
Long term, nominal US growth has been 5+%: US inflation has been about 2.5% of that while growth after inflation has been over 3%. I don't think I follow why you think this US monetary growth has been "excessive". After all, real personal income has doubled ever generation.
Fully agree that for the vast middle class of Americans, inflation has been killing them in recent years. But the problem isn't really inflation, is it? After all, that rate has been well below long term average. The real problem is that wage growth has been stagnant. Don't we need to address the disease rather than the symptom? Depression would wipe out inflation, but isn't it greater demand that's desperately needed in order to get incomes rising again?
It's true that politicians spend more than the government takes in via taxes. They have to, don't they? After all, aren't government deficits the counterpart of the private sector's ability to grow its savings in the long run? We've had government deficits 99% of the years since the US was founded. I agree with you, though, that the level of the deficits over the long-term needs to be restrained so that they only grown at a moderate rate, in line with the real growth rate. We saw what happened in the 70's when deficits got completely out of control.
I don't entirely follow your linkage between government spending and bond issuance. Since we went off the gold standard in 1971, the government has not had to "fund" any of its expenditure; i.e., it does not have to issue bonds in order to be able to spend. Bond buying and selling is a tool used by the Fed to manipulate interest rates and thus keep inflation and unemployment in check, it's not something that Congress controls, is it?
You said: "Our problem is our gov't as it stands today. They've made way too many promises that they have no way of keeping." I fully agree. Since the early 80's, both parties have enacted or tolerated tax cuts without simultaneously cutting spending, and now they act surprised that there will be a future revenue shortfall. The only question is whether we want these programs or not; it's not whether we can afford them.
Re Econ 101--Fully agree that banks are reluctant to lend at super low fixed rates. (Adjustable-rate lending seems to be available though, isn't it? At least that's what my bank tells me.) Do you think it would be wise for the Fed to stop paying banks interest on their massive excess reserves? I've read mixed opinions on this.
Yep, dividend paying stocks seem like the sweet place to be now.
Yes, US government does not need to issue Bonds, having monopoly supplier of the currency.. It is an artifact of Gold Standard. Yet, that does not mean US government should expand money supply unlimited way as it will cause hardship to the private sector. This may be too hard for some to grasp but yes, for private sector savings to accumulate, government must go to deficit in a moderate rate.
All this is counter intuitive to what people (and even economists) know about the monetary system. In fact, some of the popular solutions pushed by politicians is likely to make the matters worse and decrease economic activity in this country.
No doubt that the Fed and Treasury each do their own thing but you must realize that it's all in coordination with each other. That said, they buy or sell bonds to decrease or increase the money supply. In addition, if I'm a foreign trading partner with us, and I have a huge trade surplus (think china or OPEC), do I really see a lot of difference between holding some of it in a US bond paying about zero or in stacks of $100 bills?
Nopers, it's helicopter Ben dropping unlimited dollars by B2 bomber.
And yesterday, the joint action, while minor in and of itself, served notice that they CBs will do whatever it takes to keep this house of cards standing.
Good point...I believe this is one of the reason Ghadafi (Libya) insisted on gold for oil. By some estimated he had a stock pile 150 ton. As a result Libya was the only African nation with no debt. From ANU News:
"Libya’s energy wealth certainly played a role in its fate, since the Jamahiriya state kept around 150 tons of gold in its vaults and had avoided subordination to the Bank of International Settlements, as well as dependence on the dollar."
and,
"one possible reason in particular for Gadhafi’s fall from grace has gained significant traction among analysts and segments of the non-Western media: central banking and the global monetary system. According to more than a few observers, Gadhafi’s plan to quit selling Libyan oil in U.S. dollars — demanding payment instead in gold-backed “dinars” (a single African currency made from gold) — was the real cause. The regime, sitting on massive amounts of gold, estimated at close to 150 tons, was also pushing other African and Middle Eastern governments to follow suit."
Reply to @bee: I browsed through your linked web site. There are no good information on who owns it, who is behind that operation. Browsed through articles and they only seem to like Ron Paul. In their articles, their material is not backed up well. I cannot give a lot of credibility to this site.
Gold bugs like to create conspiracy theories. The Libyan gold story seems like yet another one.
Like they say...follow the money...and the gold. Like it or not gold still plays a role in the world. I agree that goldbugs use the same scare tactics (conspiracy theories) to sell their products but I also feel fiat currencies have a number of flaws that need to be addressed.
Not your favorite site (zerohedge) but an interesting list of country ownership of gold.
"number of flaws" indeed. You. sir, are a MASTER of understatement!
On the other hand (and there is always a damned other hand) we could say that fiat currency, like capitalism, sure leaves a lot to be desired, but they are both better than any known alternatives...
I agree with the skepticism of Bee, Old Joe and Investor. So is gold some sort of archaic vestige of monies past? . . . is a speculative commodity? or is it something of fundamental and enduring value? Good questions for us all!
If I had been Kadaffi, I might have demanded gold simply because I suspected that I was an international pariah whose diverse bank accounts could be shut down at any time if my money was declared to be criminal. Even then I would want to make sure that the gold was in my personal vaults, since the vaults in London, Zurich and New York could be sealed at any time. I'm not sure that Kadaffi's love of gold should be seen as a validation of its usefulness as a money for ordinary folks, though. He might have equally demanded payment in drugs, after all. While gold has been riding high over the past decade, those of us with longer memories can recall how far it can crash. While I hold some gold, I don't do so with confidence and see it pretty much the way I saw holding REITS in the mid 90's. Obviously, we won't all share that sense that gold is simply a bubble waiting to burst in the next few years!
Rono, re your points: --The Fed certainly has created a lot of liquidity for the banking system. I'm really not sure why you see this as a bad thing, though. While you say the Fed has created unlimited dollars, in reality, it has largely only created reserves for the banks rather than money in people's hands, hasn't it? If so, that's not the traditional definition of creating money--at least not the way that people like Friedman would have described it. If money in circulation had been created in such quantities, we'd be seeing a huge demand boom since 2008, wouldn't we? But that has not been the case. Since demand is still so very weak, I'm wondering why you're concerned about the Fed's providing reserves for banks. Now if you're saying that some more big banks should have been forced to bite the dust in 08-09, well then I heartily agree. --Agree with you that the Treasury and Fed have to work closely in tandem; one writes the checks while the other creates the money for the account. While the Treasury is theoretically unlimited in its ability to write checks, the Fed's mission of managing inflation and unemployment is quite different. But why you're concerned about this? Tell us more, please. Clearly, Bernanke would love to stimulate demand, and has begged Congress to do so. As they won't, he has dropped interest rates to the lowest possible levels. As you pointed out, this has not been enough to stimulate the economy, and he has admitted this all along. While we can agree that this has been a fairly limp policy regarding demand (although it may have kept the banks afloat). If these policies continued in years to come, after demand seriously started to revive, then this would pose a real economic problem. But now? Do you really think there's an alternative to doing this in order to avert deeper recession? --My understanding is that China wants to hold dollars simply because they want to keep pushing the dollar up against the renminbi so that Chinese exports will seem cheap to American and global buyers. So they buy bonds because they don't have much other choice--money markets pay zilch, and it they try to buy US companies, the Congress freaks out. Agree?
Glinko: I heartily agree with your observations and questions. With respect to your first paragraph, I've reprinted below an earlier suggestion made to me by Investor. This is one great book. I first got a copy from the library, and liked it so much that I ordered a keeper copy from Amazon. To my surprise and pleasure the Amazon version is really nice- it has a large number of color plates and illustrations not found in the el cheapo library version.
Simply put, if a lot of people want something, and it's in limited supply, it becomes valuable. Gold, in its non-monetary form and uses, falls under that definition. It's when you try to use the perceived "value" of gold directly as a monetary mechanism that the trouble starts. Note, however, that this does not apply to folks like Rono, who collect gold coinage, not for it's monetary value, but for it's "perceived" value as a commodity. That perceived value can change radically, sometimes on short notice. For example, I have a stash of pre-1964 90% silver quarters. Monetary value: $700. Perceived current value: 15k & change. Says who? Not a government... dealers willing to pay that amount, or close to it. Why hold "valuable" metals? Because if the world as we know it comes to an end maybe they might be of some help. (Then again, maybe not.)
From Investor: OJ, when you have time, read the book:
First to bee, the libyan doesn't matter so much as more and more countries around the world have been building up their gold reserves. This has been going on now for serveral years. I feel it's for a combination of reasons. A lessening of faith in the various and sundry fiat currencies for many reasons - mostly political. An excessive amount of greenbacks due to trade imbalances and an desire to rebalance the stash, as it were. Some sovereign geopolitikal stuff. Lots of reason. What it does it highlight the breadth of the demand for gold these days.
For ginko. What's gold? Lot's of things to lots of people. And neither you nor I have to agree with any of their reasoning or logic for it to still be a fact of the market that needs to be considered. It's like when everyone believes a lie and acts upon it as if it were true . . . it might as well have been true. I'm not anywhere near being a survivalist and think most of them are bit over the edge. Even so, their demand for gold and silver bullion is real.
The Fed creating liquidity for the system is not a bad thing - it's their job. The secret is in the method and degree. I disagree strongly with the bail out which not only didn't allow the bad to fail, it took all those private losses and put them on the backs of you and I and our kids and grandkids.
Since then, they've flooded the system with liquidity (buying up shit private debt) but the velocity of money has remained at zero. Why? Because the bankers aren't making loans at 3-4%. Oh, and BTW, Variable Mortgages still taste a bit worse than Greek bonds.
And money doesn't creat demand. And Supply Side economics is a lie. The Bush tax cuts had some great stuff - dividends, cap ex, etc. But at the time on FA many times, I said that it didn't do enough at the low end of the income ladder. The mantra has been Supply side. Cut taxes for the wealthy and they'll invest in the economy and thereby create jobs. Rubbish. Demand for your product creates jobs. If I made widgets and you cut my CapEx taxes to zero and you loan me money at zero%, I am STILL not going to build another plant or add another shift if my current plant capacity is at 70%.
Folks at the low end of the income ladders have a Marginal Propensity to Consume of 100%. That means for every additional dollar in their pocket, they will spend it all. As you work your way up the ladder, you start saving some of the extra dollar. High enough on the ladder and you save it all. Your MPC heads towards 0%. Well, the Bush tax cuts didn't do enough for Joe and Jane SixPack and they're the ones that buy stuff.
And after the market meltdowns since 2000 and the real estate meltdown, most folks are being cautious about discretionary spending anyway . . . feh. No demand . . . no jobs.
As for gov't stimulus in the Keynesian bent, the $1T spending packet of Obama went mostly to democratic fluff rather than infrastructure. They gave everyone a fish when they could have taught them how to fish.
Is the debt/deficit out of control? Only to the extent that people believe it to be. It really doesn't matter if you or I feel it so, but if enough people do and vote with their dollars that it's a smelly fish - well, then it's a smelly fish.
The Fed and Treasury should work together. I agree with some of Ron Paul but disagree with lots too. I'm not for disolving the Fed, nor putting them under greater congressional control. Egad. I AM a big fan of gov't openess and honesty. I want the gold audited. I want their books audited. I want the gov't statistics to be fair and honest and tell us the true numbers.
China is holding dollars to save their asses. They are holding so gd many dollars, they cannot afford for the dollar to crash.
As for the Fed and their policy. We still have over $100 trillion freakin dollars in unfunded liabilites. It is politically impossible to completely renege but they'll no doubt cut and reduce benefits to the greatest degree possible. They'll also raise revenues by any means politically possible. They'll still be so short, I've heard it estimated, that they will effectively have to print so many dollars to keep these promises, that they will halve its value over the next ten years. Ok. Hey, they Fed is good with this. They will print money 24/7/365 but try to keep us from going hyper with inflation or crashing the dollar or some other misery . . . and do their best to get us beyond this $100T bar tab.
That's their plan. And in all honesty, it's probably better than most. Problem is that we're likely to trudge along in this global austerity for another 10 years or so when if they'd let things fail, we'd be on the road to recovery by now - if not already there. This is what some of us feel. Not everyone.
What will happen? feh. My crystal ball is dirty. I think there's a 65% chance will muddle along for another 10 years in a global austerity - a 10% chance everything will get rosey soonest and a 25% chance the financial system will implode in some sort of nasty way.
And again, just because we see things differently, it's what the collective market - Captain Price, if you will - sees and acts upon, that matters.
Comments
Hi there Bee-
In trying to analyze possible developments based upon past experiences I don't think that history is going to be very helpful this time around. It is surely true that many various problems and crises having some factors in common with the present mess have occurred historically, and under normal circumstances we might be able to draw reasonable inferences based on that.
But those prior experiences occurred in much simpler economic models. At this time, because of unprecedentedly complex political, financial and monetary interrelationships I don't believe that anyone can begin to predict how this situation will evolve and eventually settle out.
There are just too damned many unpredictable variables involved, and frankly I think that we are seeing a lab experiment that we've lost control over, and that whatever happens will be both unpredictable and probably unstoppable at this point.
I do think that the European Union, financial relationships (both in the developed and developing countries) based upon that union, and in fact our lives are going to be radically changed by whatever happens, at least in the 10-15 year short run. The so-called underdeveloped countries may well emerge with the least overall damage, simply because they have much less to lose, and life goes on.
I also think that anyone who believes that any particular economic sector will emerge unscathed by all of this is being very, very foolish. The financial relational interdependency is just too complex.
Regards- OJ
I've got to go with Rickards fundamentally but can understand some near term relative strength for the dollar. But think about it. Look around. Do you really feel full faith and confidence in our dollar? Do you really want to get giddy about the prospects for the dollar? Geez, it's like the folks climbing the tallest mast on a sinking ship and who's at the top. duh.
Halving the dollar for export stimulation is an aspect of the great plan.
There are over $100T in unfunded liabilities (i.e. social security, medicare/aid, debt service, various and sundry other trust fund promises and no combination of benefit reduction and tax increases is sufficient to cover them. NFW. Their only possible solution is to monetize as much of it as they can without blowing things up. Estimate is that they need to halve the value of the dollar over the next 10 years to be able to even sniff about paying the UL. And even here, they'll need to really break a lot of promises and default, as it were, on a lot of obligations.
Also, an early prediction by Harry Dent was that we'd be in this austerity until around 2023. I'm not a convert and disagree with much of what he says, but this feels pretty sound.
Read this today on Yahoo.
http://finance.yahoo.com/news/gold-could-help-save-eurozone-131600825.html
Ah, but here are the Aden sisters:
http://www.kitco.com/ind/Aden/aden_nov222011.html
Gold's is up strongly against every other currency. Part relates to the normally inverse relationship between gold and the dollar
And another article,
http://www.gold-eagle.com/editorials_08/levenstein112211.html
Have a good holiday,
peace,
rono
Any financial panic sends people running to U.S. Treasuries, and it doesn't seem to matter how low the yield is - it's a flight to safety. I don't see how we avoid another major scenario of that kind in the next 6 months or so.
Look at what's happening to Asian and EM currencies right now - local currency debt funds are getting slaughtered short term.
Rono,
I'm always very impressed by your thoughtful comments. I don't have any inkling over the direction that the dollar will take, but I'm always puzzled about the economics behind the thinking of the gold bugs, and about several of your statements above.
"Do you really feel full faith and confidence in our dollar?"
--Considering how low interest rates are on US bonds, I guess I'm just amazed at how amazingly strong confidence is in the US dollar. Global markets are buying into both USD bonds and gold because they're seen as safe hedges, aren't they? Gold is rising against all currencies, isn't it?
"There are over $100T in unfunded liabilities . . . "
--As the US is the issuer of its own sovereign currency, it doesn't "fund" its expenditures, does it? The US government can spend any amount of money that it wants, in reality. Unlike countries in the Eurozone, where individual member states do not control currency issuance, the US does not need to issue bonds in order to spend.
". . . Their only possible solution is to monetize as much of it as they can without blowing things up."
--A country can't "monetize" its debt if it's not on a gold/silver standard, can it? I know that there are a lot of pundits who write as if we still were, and they also talk about "devaluing" the exchange rate. How is it helpful to pretend that we don't have a fiat currency and floating exchange rates?
". . . they'll need to really break a lot of promises and default, as it were, on a lot of obligations. "
--As US bonds are all denominated in US dollars and not in foreign currencies or in gold certificates, why would the US government ever choose to default, i.e., stop paying interest on its bonds or refusing to redeem them when they're due? The US government is unconstrained in its ability to issue US dollars; it doesn't need to have any gold in order to do so. The only way the US could ever default would be if Congress voted to stop honoring US bonds.
You said:
"For you and Washington to say that the US can expand the currency without regard to fundamentals (the result of inflation or even hyperinflation), is without precedent in the history of currency."
--Well, I certainly did not say that, and I'm not aware of anyone in DC who would say anything like that.
I fully agree that aggressive expansion of money supply during boom times will lead to inflation. As you point out, the Fed must look at the relevant fundamentals when carrying out monetary policy.
"You state that the US government doesn't fund its own expenditures. Well last I heard, despite Congressional disagreements, the US government still has an official budget every year. Based on your comment, why do they even need to put forward any effort?"
--As we know, government spending is a component of demand. Large government deficits during times of prosperity will lead to higher than normal inflation. There may even be times when it's prudent for the government to run a surplus. (Fundamentals matter, both for fiscal and monetary policy.)
This doesn't change the fact that government spending does not need to be "funded".
"While I agree that you cannot pretend that our currency is fixed to gold, that does not excuse the unprecedented expansion of our currency."
--You're seem to be claiming that US money supply is inexcusably large. Don't we need an objective criterion for judging what constitutes appropriate expansion?
I guess I'd agree with your judgement that money supply is currently too large if I saw that the economy was heating up. That's clearly not the case.
" . . . by keeping interest rates below where the markets would price them, they are already breaking promises to owners of Treasuries in terms of yield. "
--I agree that bond-holders and cash-holders are losing out after inflation, and are with you and Rono about that. (I didn't understand that's what Rono meant when he used the word "default".)
Effectively, we bond and cash holders are all being taxed in order to subsidize the big lenders and keep them afloat. As much as that outcome makes me mad, I can't agree that the government has ever promised us that Treasuries would yield a real return after inflation. Caveat emptor.
"" . . . by keeping interest rates below where the markets would price them, they are already breaking promises to owners of Treasuries in terms of yield. "
--I agree that bond-holders and cash-holders are losing out after inflation, and are with you and Rono about that. (I didn't understand that's what Rono meant when he used the word "default".)
Effectively, we bond and cash holders are all being taxed in order to subsidize the big lenders and keep them afloat. As much as that outcome makes me mad, I can't agree that the government has ever promised us that Treasuries would yield a real return after inflation."
A few thoughts about this.........
In terms of any promise about Treasury rates; one need only rely upon the perception of the market place as to value. In the case of U.S. Treasury issues, it is indeed a fact that the Fed is involved with "false" rates at this time. On the other hand, the Euro Central Bank has reportedly been buying Euro area bonds by the boat load and this has had little impact upon yields flying to the sky for many countries in Europe.
Bond holders do not necessarily lose any money, but may indeed profit from continued lower yields; as the money is to be made with the increased value of the bonds. I don't care that the 10 year yield was 3.5% a year ago and is now under 2%, and would in no fashion be a possible match for inflation. However, the price one paid for IEF a year ago and the increase in value (+ 12% YTD, per M*) is the real counting point for holding this etf. When yields start to flip in a more permanent fashion to the higher side; then one must be paying attention to the value of the bonds beginning to fall. With a gradual increase in yields, many bond fund holders may not find any special impact upon the value of their holdings.........if, the fund managers are able to rotate the fund's bond holdings properly to take advantage of higher yielding, newly issued bonds.
If any bond type did indeed stay flat in yield for any length of time; then one should be more concerned about only earning a 2% yield.
As to cash holders, CD's, MM's and related. Yes, low rates cause problems with attempting to earn any positive monies in these areas with low yields reflected from the Treasury sector. Another negative impact for this same area is that the IRS/Treasury loses tax revenue from these same accounts; as the holders have very low earnings to report and be taxed.
All of this creates very complex and intertwined circles of pain and pleasure; dependent upon where one's monies are parked at or for a given period of time.
My totally inflation adjusted 2 cents worth.
Regards,
Catch
Agree.
"All of this creates very complex and intertwined circles of pain and pleasure." Indeed!
Ginko
Right now the dollar is the least smelly fish around.
Sure, we can print dollars 24/7/365 like we've been doing, but sooner or later, the 'full faith and confidence' starts to erode. Since 1913, the dollar has lost 96% of its value. In 1960, little rono could go to the store with a quarter and buy a loaf of bread. That same silver quarter is now worth $6-7 in melt value - or a loaf of bread or two. An ounce of gold would buy a nice toga and sandals back in Rome, a nice suit of clothes during our Roaring 20's and today at $1700. Lastly, we used to have 5&10, or Dime stores. Today we have Dollar stores.
Monetization is basically printing money to pay your debts. Let's say I owe you $100K and go to my basement and print off 1000 $100 rono bills and pay you off. Are you happy? Sure, if you can in turn spend those rono bills and receive full value. What if you can't? Having our dollar and bonds be the least smelly fish in the bucket doesn't enspire my confidence.
As for defaulting, it's how and when and to whom. A reduction in Social Security benefits is a default - a broken promise, as it were. Or, if I pay you with rono money is that a default?
Hell, just them fixing the CPI is a a default. Real inflation is running around 10%, but the CPI has it around 1-2%. Check the formula coach. shadowstats.com.
Oh and artificially low rates are resulting in a lack of lending. Price control d/s curves from Econ 101. You impose artificially low prices on anything (including loans) and supply disappears. duh.
peace,
rono
Enjoyed your description of the dollar as the least smelly fish around! There's a lot of truth to that. However, I just don't see why you see the dollar as a fundamentally sinking ship. As long as we're pursuing deflationary fiscal policies (i.e., government spending being less than the shortfall in investment and consumer spending), why do you think the dollar would weaken?
I understand now that you're using "monetization" as another way of saying inflation.
We all have a gut feeling that higher prices must always be bad. However, I think my perspective might be a little different:
We know that all currencies have experienced inflation almost every year. And we know that even the most conservative central bankers (like the Germans) think that slow but steady inflation of at least 2% is helpful for keeping the economy rolling along.
So, isn't the crucial objective to keep REAL incomes rising faster than inflation in the long term? After all, real incomes have risen much faster than inflation over the past century, haven't they?
I guess my key question would be: are you saying that it would be better to have zero inflation, even if we had no growth in real wealth? I know that sounds like a leading question, but I don't mean it that way. What I mean is: If some low inflation is the grease that keeps the machine running at a faster speed, isn't that a price that's well paid? If we're richer AFTER inflation, what's wrong with that?
I fully agree that there will be a lot of pressure on politicians to find stealthy ways to cut Social Security, Medicare, education, veterans' benefits and other core social services! There's no doubt that some cuts to the growth in social benefits is going to happen, is there.
(As for Shadowstats . . . Aren't we in Wonderland there, where it's: First the verdict, then the trial?)
Your last point about interest rates is really interesting and I'd like to understand that better. I'm wondering whether you mean that if interest rates were higher, banks would be lending more? An interesting hypothesis.
Ginko
The books will tell you that in an ideal world of monetary policy, inflation would be kept equal to the rate of growth in the economy. That said, it's hardly ever been the case, in this country since 1913, but everywhere else where there were no constraints upon excessive growth in the money supply. And, that's perhaps the real problem. Politicians want to spend more than they want to tax. It's easy to get reelected after you've brough lots of gov't $ to the locals and haven't had to raise their taxes. It's easy to have a war to end all wars and keep the expenditures 'off budget.' feh. You just print more money and if they won't buy your bonds at the artificially low rate you're insisting upon, well, then damnit, we'll buy them ourselves. Man, do you have any idea how much of the bond auction goes to 'other'?
Nopers, our problem is our gov't as it stands today. They've made way too many promises that they have no way of keeping. Hell, at this stage, they can't even agree on the day of the week, leave alone prudent fiscal policies.
As for the statistics, I like Williams approach to the gov't statistics. Why not do them as they're done today but also calculate them as they were during Reagan's admin. ah.
I'm sure that you're a shopper and realize that we're getting killed on food, energy and health care. Yeah, flat screen TV's and IPads are cheaper every day, but how many do you or I need? You've got the internet and globalism keeping prices down on consumer electronics and whatnot, but we're still getting killed with inflation. Ever ask yourself why? It's the bloody formula and make up of the market basket. Fully half of the basket is subject to hedonic adjustments. Yeah, I know. If a product or service is 'new and improved', you can charge more and it doesn't count. Sounds good. However, it's only so, IFF I can still buy the old and unimproved product or service. Cripes, Big Al said a few years back that if steak got too expensive, they could buy hamburger - and it shouldn't count as inflationary.
Unemployment? er, if you run out of benefits, and you don't continue to report, they start counting you as employed. How about discouraged and not reporting? How about underemployed? feh. Real unemployment is over 20 gd%. The misery index is over 30.
Oh, and if you make corrections to the inflation figures, it impacts GDP and results in NO growth since the dot.com meltdown.
Lastly, about interest rates and the credit market. The rate is interest is the price of money. It's what you have to pay to get money. Ergo, the credit market is not unlike any other market with supply and demand. Now, what we've been seeing for several years now is the Fed effectively setting interest rates at zero in order to help stimulate the economy. Sounds good. BUT, if their rate setting means that mortgages are going to be at 4%, and I'm a banker who feels that I need at least 6% on a 30 year note to cover future uncertainty - or a banker who simply feels that 4% is too gd low . . . Oooops. So sorry, we're fresh out of available funds to lend. We've got stress tests and all and besides, you once stiffed a waitress.
Are you old enough to remember Nixon in the '70s when he put price controls on gasoline? All of a sudden, every one was out. A couple of years ago, the paper price of gold and silver was driven down by short sellers so low that supply dried up. Potential sellers decided that the paper price was below what they felt was fair value.
In Econ 101, during the study of demand/supply curves, if you impose an artificial price below market equilibrium, supply disappears. This is what has happened to the credit market and why so few banks are making loans. Why on earth should I loan you money at a rate below what I feel is fair?
What as exacerbated the problem is Europe and their problems and how so many folks looking for a safe haven have turned to the dollar. It's helping to keep market prices low on our bonds.
take care,
peace,
rono
Sure it matters. The easy money policies coupled with either nil interest or too much risk, leaves few investment options that are attractive from a yield perspective. Hell, it's always searching for yield, but right now, dividend paying stocks are the sweet spot to overweight.
just my humble opinion,
peace,
rono
I agree with you that monetary policy is very, very loose right now and that this is very painful for people who rely on bond income. It hurts all the more when inflation is higher that bond interest rates. (Reagan famously said: "Inflation is the cruelest tax.")
Nevertheless, the alternative of depression is less palatable. Without much more aggressive fiscal stimulus--which would be a far more desirable option right now and which would lead to the Fed backing off its super-low interest rates--depression would be the result. As Bernanke has said all along, the Fed is only pursuing it monetary policy because Congress is not stepping up to the plate and doing what it needs to do to get the economy growing.
Long term, nominal US growth has been 5+%: US inflation has been about 2.5% of that while growth after inflation has been over 3%. I don't think I follow why you think this US monetary growth has been "excessive". After all, real personal income has doubled ever generation.
Fully agree that for the vast middle class of Americans, inflation has been killing them in recent years. But the problem isn't really inflation, is it? After all, that rate has been well below long term average. The real problem is that wage growth has been stagnant. Don't we need to address the disease rather than the symptom? Depression would wipe out inflation, but isn't it greater demand that's desperately needed in order to get incomes rising again?
It's true that politicians spend more than the government takes in via taxes. They have to, don't they? After all, aren't government deficits the counterpart of the private sector's ability to grow its savings in the long run? We've had government deficits 99% of the years since the US was founded.
I agree with you, though, that the level of the deficits over the long-term needs to be restrained so that they only grown at a moderate rate, in line with the real growth rate. We saw what happened in the 70's when deficits got completely out of control.
I don't entirely follow your linkage between government spending and bond issuance. Since we went off the gold standard in 1971, the government has not had to "fund" any of its expenditure; i.e., it does not have to issue bonds in order to be able to spend. Bond buying and selling is a tool used by the Fed to manipulate interest rates and thus keep inflation and unemployment in check, it's not something that Congress controls, is it?
You said: "Our problem is our gov't as it stands today. They've made way too many promises that they have no way of keeping."
I fully agree. Since the early 80's, both parties have enacted or tolerated tax cuts without simultaneously cutting spending, and now they act surprised that there will be a future revenue shortfall. The only question is whether we want these programs or not; it's not whether we can afford them.
Re Econ 101--Fully agree that banks are reluctant to lend at super low fixed rates. (Adjustable-rate lending seems to be available though, isn't it? At least that's what my bank tells me.) Do you think it would be wise for the Fed to stop paying banks interest on their massive excess reserves? I've read mixed opinions on this.
Yep, dividend paying stocks seem like the sweet place to be now.
Cheers,
Ginko
http://pragcap.com/resources/understanding-modern-monetary-system
http://hir.harvard.edu/debt-deficits-and-modern-monetary-theory
Yes, US government does not need to issue Bonds, having monopoly supplier of the currency.. It is an artifact of Gold Standard. Yet, that does not mean US government should expand money supply unlimited way as it will cause hardship to the private sector. This may be too hard for some to grasp but yes, for private sector savings to accumulate, government must go to deficit in a moderate rate.
All this is counter intuitive to what people (and even economists) know about the monetary system. In fact, some of the popular solutions pushed by politicians is likely to make the matters worse and decrease economic activity in this country.
Thanks investor...I think Ron Paul would like us back on the gold standard.
No doubt that the Fed and Treasury each do their own thing but you must realize that it's all in coordination with each other. That said, they buy or sell bonds to decrease or increase the money supply. In addition, if I'm a foreign trading partner with us, and I have a huge trade surplus (think china or OPEC), do I really see a lot of difference between holding some of it in a US bond paying about zero or in stacks of $100 bills?
Nopers, it's helicopter Ben dropping unlimited dollars by B2 bomber.
And yesterday, the joint action, while minor in and of itself, served notice that they CBs will do whatever it takes to keep this house of cards standing.
peace,
rono
Hey rono,
Good point...I believe this is one of the reason Ghadafi (Libya) insisted on gold for oil. By some estimated he had a stock pile 150 ton. As a result Libya was the only African nation with no debt. From ANU News:
"Libya’s energy wealth certainly played a role in its fate, since the Jamahiriya state kept around 150 tons of gold in its vaults and had avoided subordination to the Bank of International Settlements, as well as dependence on the dollar."
and,
"one possible reason in particular for Gadhafi’s fall from grace has gained significant traction among analysts and segments of the non-Western media: central banking and the global monetary system. According to more than a few observers, Gadhafi’s plan to quit selling Libyan oil in U.S. dollars — demanding payment instead in gold-backed “dinars” (a single African currency made from gold) — was the real cause. The regime, sitting on massive amounts of gold, estimated at close to 150 tons, was also pushing other African and Middle Eastern governments to follow suit."
Quite possibly the man who knew too much?
Wonder where Libya's gold is now?
Related link:
http://www.anunews.net/blog/?cat=4333
Gold bugs like to create conspiracy theories. The Libyan gold story seems like yet another one.
Like they say...follow the money...and the gold. Like it or not gold still plays a role in the world. I agree that goldbugs use the same scare tactics (conspiracy theories) to sell their products but I also feel fiat currencies have a number of flaws that need to be addressed.
Not your favorite site (zerohedge) but an interesting list of country ownership of gold.
http://www.zerohedge.com/news/battle-libya-almost-over-battle-its-144-tons-gold
On the other hand (and there is always a damned other hand) we could say that fiat currency, like capitalism, sure leaves a lot to be desired, but they are both better than any known alternatives...
I agree with the skepticism of Bee, Old Joe and Investor. So is gold some sort of archaic vestige of monies past? . . . is a speculative commodity? or is it something of fundamental and enduring value? Good questions for us all!
If I had been Kadaffi, I might have demanded gold simply because I suspected that I was an international pariah whose diverse bank accounts could be shut down at any time if my money was declared to be criminal. Even then I would want to make sure that the gold was in my personal vaults, since the vaults in London, Zurich and New York could be sealed at any time.
I'm not sure that Kadaffi's love of gold should be seen as a validation of its usefulness as a money for ordinary folks, though. He might have equally demanded payment in drugs, after all.
While gold has been riding high over the past decade, those of us with longer memories can recall how far it can crash. While I hold some gold, I don't do so with confidence and see it pretty much the way I saw holding REITS in the mid 90's. Obviously, we won't all share that sense that gold is simply a bubble waiting to burst in the next few years!
Rono, re your points:
--The Fed certainly has created a lot of liquidity for the banking system. I'm really not sure why you see this as a bad thing, though.
While you say the Fed has created unlimited dollars, in reality, it has largely only created reserves for the banks rather than money in people's hands, hasn't it? If so, that's not the traditional definition of creating money--at least not the way that people like Friedman would have described it.
If money in circulation had been created in such quantities, we'd be seeing a huge demand boom since 2008, wouldn't we? But that has not been the case. Since demand is still so very weak, I'm wondering why you're concerned about the Fed's providing reserves for banks.
Now if you're saying that some more big banks should have been forced to bite the dust in 08-09, well then I heartily agree.
--Agree with you that the Treasury and Fed have to work closely in tandem; one writes the checks while the other creates the money for the account. While the Treasury is theoretically unlimited in its ability to write checks, the Fed's mission of managing inflation and unemployment is quite different. But why you're concerned about this? Tell us more, please.
Clearly, Bernanke would love to stimulate demand, and has begged Congress to do so. As they won't, he has dropped interest rates to the lowest possible levels. As you pointed out, this has not been enough to stimulate the economy, and he has admitted this all along. While we can agree that this has been a fairly limp policy regarding demand (although it may have kept the banks afloat). If these policies continued in years to come, after demand seriously started to revive, then this would pose a real economic problem. But now? Do you really think there's an alternative to doing this in order to avert deeper recession?
--My understanding is that China wants to hold dollars simply because they want to keep pushing the dollar up against the renminbi so that Chinese exports will seem cheap to American and global buyers. So they buy bonds because they don't have much other choice--money markets pay zilch, and it they try to buy US companies, the Congress freaks out. Agree?
Cheers,
Ginko
Simply put, if a lot of people want something, and it's in limited supply, it becomes valuable. Gold, in its non-monetary form and uses, falls under that definition. It's when you try to use the perceived "value" of gold directly as a monetary mechanism that the trouble starts. Note, however, that this does not apply to folks like Rono, who collect gold coinage, not for it's monetary value, but for it's "perceived" value as a commodity. That perceived value can change radically, sometimes on short notice. For example, I have a stash of pre-1964 90% silver quarters. Monetary value: $700. Perceived current value: 15k & change. Says who? Not a government... dealers willing to pay that amount, or close to it. Why hold "valuable" metals? Because if the world as we know it comes to an end maybe they might be of some help. (Then again, maybe not.)
From Investor: OJ, when you have time, read the book:
The Power of Gold: The History of an Obsession
http://www.amazon.com/Power-Gold-History-Obsession/dp/0471003786/
(First visit MFO's Amazon.com link to order)
Late Peter Bernstein in this book not only covers gold but also the history of money.
And here's the Amazon/MFO entry link: MFO link to Amazon
First to bee, the libyan doesn't matter so much as more and more countries around the world have been building up their gold reserves. This has been going on now for serveral years. I feel it's for a combination of reasons. A lessening of faith in the various and sundry fiat currencies for many reasons - mostly political. An excessive amount of greenbacks due to trade imbalances and an desire to rebalance the stash, as it were. Some sovereign geopolitikal stuff. Lots of reason. What it does it highlight the breadth of the demand for gold these days.
For ginko. What's gold? Lot's of things to lots of people. And neither you nor I have to agree with any of their reasoning or logic for it to still be a fact of the market that needs to be considered. It's like when everyone believes a lie and acts upon it as if it were true . . . it might as well have been true. I'm not anywhere near being a survivalist and think most of them are bit over the edge. Even so, their demand for gold and silver bullion is real.
The Fed creating liquidity for the system is not a bad thing - it's their job. The secret is in the method and degree. I disagree strongly with the bail out which not only didn't allow the bad to fail, it took all those private losses and put them on the backs of you and I and our kids and grandkids.
Since then, they've flooded the system with liquidity (buying up shit private debt) but the velocity of money has remained at zero. Why? Because the bankers aren't making loans at 3-4%. Oh, and BTW, Variable Mortgages still taste a bit worse than Greek bonds.
And money doesn't creat demand. And Supply Side economics is a lie. The Bush tax cuts had some great stuff - dividends, cap ex, etc. But at the time on FA many times, I said that it didn't do enough at the low end of the income ladder. The mantra has been Supply side. Cut taxes for the wealthy and they'll invest in the economy and thereby create jobs. Rubbish. Demand for your product creates jobs. If I made widgets and you cut my CapEx taxes to zero and you loan me money at zero%, I am STILL not going to build another plant or add another shift if my current plant capacity is at 70%.
Folks at the low end of the income ladders have a Marginal Propensity to Consume of 100%. That means for every additional dollar in their pocket, they will spend it all. As you work your way up the ladder, you start saving some of the extra dollar. High enough on the ladder and you save it all. Your MPC heads towards 0%. Well, the Bush tax cuts didn't do enough for Joe and Jane SixPack and they're the ones that buy stuff.
And after the market meltdowns since 2000 and the real estate meltdown, most folks are being cautious about discretionary spending anyway . . . feh. No demand . . . no jobs.
As for gov't stimulus in the Keynesian bent, the $1T spending packet of Obama went mostly to democratic fluff rather than infrastructure. They gave everyone a fish when they could have taught them how to fish.
Is the debt/deficit out of control? Only to the extent that people believe it to be. It really doesn't matter if you or I feel it so, but if enough people do and vote with their dollars that it's a smelly fish - well, then it's a smelly fish.
The Fed and Treasury should work together. I agree with some of Ron Paul but disagree with lots too. I'm not for disolving the Fed, nor putting them under greater congressional control. Egad. I AM a big fan of gov't openess and honesty. I want the gold audited. I want their books audited. I want the gov't statistics to be fair and honest and tell us the true numbers.
China is holding dollars to save their asses. They are holding so gd many dollars, they cannot afford for the dollar to crash.
As for the Fed and their policy. We still have over $100 trillion freakin dollars in unfunded liabilites. It is politically impossible to completely renege but they'll no doubt cut and reduce benefits to the greatest degree possible. They'll also raise revenues by any means politically possible. They'll still be so short, I've heard it estimated, that they will effectively have to print so many dollars to keep these promises, that they will halve its value over the next ten years. Ok. Hey, they Fed is good with this. They will print money 24/7/365 but try to keep us from going hyper with inflation or crashing the dollar or some other misery . . . and do their best to get us beyond this $100T bar tab.
That's their plan. And in all honesty, it's probably better than most. Problem is that we're likely to trudge along in this global austerity for another 10 years or so when if they'd let things fail, we'd be on the road to recovery by now - if not already there. This is what some of us feel. Not everyone.
What will happen? feh. My crystal ball is dirty. I think there's a 65% chance will muddle along for another 10 years in a global austerity - a 10% chance everything will get rosey soonest and a 25% chance the financial system will implode in some sort of nasty way.
And again, just because we see things differently, it's what the collective market - Captain Price, if you will - sees and acts upon, that matters.
peace,
rono