Friday, May 19, 2006

Environmentalist Economics

Ogden Valley in Utah is one of the more beautiful spots in the USA. Like other recreation areas, the environmentalists have done a laudible job of tending to, mapping and caring for some very pleasant nature walks around the lake, over the green meadows, and up into the snow-capped mountains where three winter ski resorts have transformed themselves into hikers' and bikers' paradise.

Ogden Valley
[Thanks to for the photo.]

I couldn't help but laugh, though, when I spotted instructions about how we could contribute to the environment by pulling out a weed by the roots and laying it down on the path, to be picked up, I suppose, by some greenie's caring hands.

Dyer's Woad
[Thanks to James Parks and for the photo.]

It's called Dyer's Woad, and it's not an unattractive yellow flower as weeds go; but it takes over pastureland too easily, according to State authorities. Grazing animals will not eat it (thankfully, because it's somewhat toxic), and it is difficult to eradicate once established.

Dyer's Woad

I guess the environmentalists' solution, ineffective as it may be as a weed-killer, does succeed in giving them some sort of marginal return, if only as an assuaging balm to their illogical and troubled soul; every little weed we pull ("being sure to get all the root") is one battle won in the war against the more evil elements of nature. However, the more realistic State is resigned to the use of biochemistry to fight the invasion, according to this website.

We'll see who gets there first.

Disconnect Between Treasury and Fed

Today, Treasury Secretary Snow announced the administration's preference for more regulation of the mortgage industry.

"Echoing comments made earlier by Treasury Undersecretary Randal Quarles, Snow said: 'We believe that limitations should be placed on the size of the housing GSEs' retained mortgage investment portfolios, and that the GSEs should have a "world class" regulator with the authority and direction to limit the size of their retained portfolios.' " (reference article)

This seems contrary to the Republican's platform of less regulation and is probably a counterproductive idea. But worse than that, perhaps left and right hands (Treasury vs. Fed) should get together from time to time and discuss what each is going to say and do? They're not supposed to consult each other; the Fed is an "independent" organism, remember, so whatever the Treasury says is not necessarily going to be heeded by the Fed. But at least they could inform each other of their respective agendas.

What we have now is a Fed that likes to blow bubbles and a Treasury that wants to put a vice on them -- hardly the way to correct the problem.

The problem should be attacked at the source, so perhaps if the Treasury asked kindly enough, the Fed would be willing to stop blowing the bubbles in the first place? And the Fed could politely point out to Treasury that they are supposed to be pro-free-market and not against? Duh...

[Thanks to and Reuters for the photo.]

Good News for Gold Bugs

By the end of 2006, there will be a gold stock index that concentrates all of its efforts exclusively on gold stocks.

"Standard & Poor's, the world's leading index provider, and TSX Group announced plans this week to create a real-time global gold index. Based in Canada, the index will track key gold mining companies around the globe." (ref)

gold bars
[Thanks for for the image.]

See this also for the original announcement.

I hope that all of this recent gold activity wakes the central banks of this world up to the fact that gold can still play an essential role in keeping track of the issuance of currencies -- in fact, better than that: It will, whether they like it or not. Now it's up to them to figure out how best to implement it. (Personally, I think they've missed the boat so far.)

I mean, how many times do I have to say this? You can take the gold out of the standard, but you can't take the standard out of gold.

Sunday, May 14, 2006

"Be Afraid of the Dollar, Not Gold"

[Thanks to for the image.]

These words have got to be one of the best statements I have read recently:

"This is where mainstream economics turns logic upside down. Instead of realizing that the inflation before the collapse of certain industries is the cause, mainstream economics uses econometrics to examine piles of data. The data itself becomes synonymous with the recession, as though nothing in the past helped cause the present circumstances. The recession caused itself. From this thought pattern, it then follows that to adjust those 'markers' of the recession is to provide the cure. If certain industries are collapsing and prices are falling, the government must inflate even faster, argue mainstream economists. It is akin to pushing the mercury in a thermometer down to cure a fever."

This guy gets it. Read the whole article, because he's got it right. I don't know about the price of gold in the near future, but the thinking of this "ordinary" gentleman is as good as any academic economist's ought to be.

Now, why aren't the perfessers on this track as well? Hubris, maybe? Belief that their macroeconomic or econometric voodoo is better than common sense?

PS Discloser: The author of these comments has some connection with a website of a 911 conspiracy theory group that I do not feel I can support without further research. I guess that just goes to show that common sense can be found in the most unusual places, and that you can't judge a cover by its book.

Gore's Free Market Ideas As Bad As His Credibility

If you want to have a friendly laugh, read Gore's statements about how the free market works. Among them is this (source: linking to, on the subject of Global Warming and energy production:

"There is so much low-hanging fruit. We are wasting more than 90 percent of the energy we think we're using. If we actually join this global effort [Kyoto], then the next day every member of every board of director of every corporation on the planet will have a fiduciary obligation to reduce carbon emissions quickly and dramatically — or else they're not protecting shareholder value.

"We need to use the forces of the marketplace [sic] as positive allies to solve this crisis, and we can. And I think we will. "

Forces of the marketplace???? Ha-ha-ha-ha-ha-ha-ha-ha-ha-HAAAAAAAA! (My stomach hurts.)

[Thanks to for the photos.]

Oh well. His heart does seem to be in the right place. I like the guy much more as a GW Nut than as a presidential candidate. Let's hope this is not what he says it isn't, i.e. a roundabout way to get into the race again. He's so much more likable as Good Ol' Al. By the way, did you know he's a director of Apple and a senior advisor at Google? Who knew?

Energy: Don't Beat 'Em, Join 'Em

Stop bugging the executives of Exxon, et al., and let's get on with the real solution to our energy problem. The military may not always be the icon we want to promote when it comes to the free market, but here is an illustration of how rising prices can inspire technological advancement, and it just happens to involve the military.

[Thanks to for the picture.]

The US Air Force is tired of spending millions more on petroleum-based fuel and is now investigating alternatives derived from coal and natural gas, both of which the US has in abundance. According to this NY Times article found at Drudge, "The US is essentially the Saudia Arabia of coal."

And before the environmentalists get all excited, the market will also find ways to deal with any CO2 problem if there actually is one, although last I heard plants love CO2 and make oxygen from it, so what's the big deal with having more greenery and oxygen? (Almost got my tongue in my cheek...)

France Going Fascist?

I guess they don't really even need Mr. LePen to get the totalitarian thing going. The French group Liberte-Cherie reports that a member was distributing flyers in front of a building in Paris where the party in power (the UMP) was having a committee meeting, when 40 cops came out of nowhere and escorted the fellow to the nearest subway and forced him onto a train. Yet he was peaceful, respectful, obedient, and only distributing pieces of paper with an invitation on them.

[Thanks to for the image.]

What happened to "Liberte Egalite Fraternite?" The only crime this group has committed is the promotion of free-market ideas.

France's future is not rosy. If LePen doesn't get 'em, I guess Sarkozy will, although I can't believe the latter's intentions are quite as evil as those of Mr. LePen are alleged to be. (Read more.)

Saturday, May 13, 2006

Good News, Maybe? And a Comment About the Fed

The trade deficit is narrowing. The question is: Is it the beginning of a trend or is it a glitch? ( It certainly makes sense, given the falling foreign exchange value of the dollar. Too bad it risks turning from a slow fall to a free fall, sometimes called a "flight from the dollar," the result of stampeding dollar speculators leaving the scene. If Bernanke can resist his instincts to drop money onto the economy and keep rates elevated, maybe it won't be catastrophic.

It just occurred to me: Maybe the Fed has been trying to lower the exchange value of the dollar with all of their credit-pumping. I mean, they did look surprised that all of their dollars came back as what they call a "global savings glut."

It's true, as our classicist John Stuart Mill states, there are two things that control prices and money flows: The market, with its supply and demand, and cost of production, but also another factor that he calls "Custom." The world has gotten into the custom of dealing with (and turning to their advantage) the US's strong dollar and economy. (There is also the fact that central banks and large banking institutions have gotten into the currency speculating business.)

[Thanks to for the drawing. I can't resist noting in passing how much Professor Mill and my father E.C. Harwood look alike.]

In the past, this custom has served foreigners well, as US assets have tended to retain and even increase in real value. Today, however, -- in fact, for some decades now, the dollar has been approaching the status of "just another currency," subject as all currencies are not only to a people's productivity (as great as ours is), but also to the interference (otherwise known as "oversight") of their leaders.

So do you suppose the Fed thought they were encouraging the world to lower their customary expectations of a strong dollar by pumping money into the system? ... Nah. They're too smart not to realize it would backfire. So what was their motive? Beats me.

Naughty Central Banks

Now we have more evidence that war, China and that unruly Middle East are not the only causes of our recent commodity turmoil. Even the UK Telegraph got it right when they said:

" Behind [all this increased stealing of metals around the world because of skyrocketing prices] is excess liquidity created by four years of easy money from the world's central banks."

[Click on image for a larger version of this dragon discovering thieves in his treasure trove. And thanks to for the image.]

Yes-siree, they've hit the nail on the head. It's bubbling excessive purchasing media chasing after too little goods -- coinciding with the normal, cyclical reevaluation of these commodities vis-a-vis demand. That's what speculators do with excess liquidity. They search out undervalued investments to hike up the price beyond demand and suck up the profits before moving on like locusts to more profitable pastures, assuming there are any left.

If there were any, that would be commotion enough; but the alternative is a general business crisis, which at this point is more likely, because there aren't many such pastures left -- except to come back to where they've already been, like the Dow, etc. Ultimately, this whole spiraling bubble has to come to an end, and it won't be pretty.

You see, Devil Inflation does not follow the rules of central bankers. It does not necessarily start with the CPI so that our kind fiscal overseers can get a handle on it. Rather, it starts where it wants, this time for example, with the Dot-Com Bubble in 2000, and it moved on to real estate. Now it's moving onto commodities, and ultimately it may -- or it may not -- show its ugly head in our general price level. Of course, even if it does, signaling to our overseers to react, by then it'll be too late.

What they don't realize is that they created this Monster back in the 90s, when they refused to let things continue to cool off and to allow the general price level to fall, in accordance with Volcker's intentions and the general principles of economics, especially those of foreign exchange. The result is our precarious situation today. And the war, China and the Middle East situation don't help.

I must also pause to make clear to my readers the distinction between Devil Inflation and price increases. Sometimes, price increases are a good thing, just as price decreases are not always the Great Depression. (Ask me for an explanation and I will afford same.) But for some reason, our gentle Fed Fathers of this world have chosen to ignore these two facts, facts which they must surely know, being as they are all perfessers and docters of economics. (Or if they've forgotten, perhaps they should go back and read their John Stuart Mill.)

See more about how French bandits are digging up copper lines along the super-fast trains otherwise known as the TGV, in this article.

Friday, May 12, 2006

A Flea in Bernanke's Ear

Hi. KatyDee Gadfly here. I wish I could turn myself into a flea for just a moment, so I could skitter on over to the Fed to slip a little idea or two into Bernanke's ear.

[Thanks to for the image.]

The FOMC (Federal Open Market Committee that determines how our monetary system will function) reminds us regularly that they are keeping a very fatherly eye focused on the Economic Data, so as to be able to adjust the Fed rate up or down appropriately and keep the American -- to wit the world -- economy on an even keel. From their statements, we can conclude that they are mainly concerned with inflation and employment.

In order for CPI inflation to rise, it is not enough for there to be excess purchasing media in circulation. That media must reach the US marketplace -- and not just any marketplace; it must reach the CPI items (cars, electronics, food, etc.)

Now, from the data we can assume that somewhere between 1.5 to 5% annual inflation (depending which flavor of inflation figures you prefer, core or regular) must correspond to that portion of the increased circulating purchasing media that is reaching those items. But I can see three reasons why there might be some, or even a lot, that is not reaching them.

1. With the exception of Holland, the US has a trade deficit with all of its major trading partners, and as we all know, our current account "deficit" [CAD] is at a record all-time high. This means that our trading partners have chosen to use our dollars to buy something other than those products that are included in CPI calculations. We know this to be true, because the CAD proves this. They are (or were until recently) buying treasury bonds and other financial assets that are encouraging inflating of asset prices in the US, assets like real estate, the stock market, derivatives and CLOs (collateralized loan obligations like mortgages.) This must mean that our other CPI products are not of interest to them, probably because the unwarrantedly high exchange value of the dollar (which they themselves have maintained through their purchase of dollar instruments and assets) renders most of our manufactured CPI products too expensive.

2. Because the US Fed has chosen to turn a blind eye to the inflated prices of assets other than CPI, or even worse, the more limited core CPI, they have unfortunately chosen to ignore the symptoms of excessive circulating purchasing media that the inflated dollar-asset prices represent. By doing this, they had -- at least up until recently -- assured continuous credit pumping, which both foreign and native investors have been syphoning off into more real estate and interest-chasing instruments like derivatives. Why? Because there is no other capital market for their money, being as general US consumption and foreign trade dollars buying US CPI products have not increased those specific prices enough to warrant production expansion in those industries, reducing the demand for capital-investment dollars in those industries.

3. There is a third element of tragedy here. By watching the wrong figures, the Fed is insuring America's workers that their salaries remain stagnant, not even keeping pace with the CPI until this year. Salaries presently have at least a four-year lag. Obviously, producers are not going to hire (i.e. raise wages) if they're not seeing a rise in prices to justify expanding production. They're now starting to, but why now? Because (1) the derivatives and other risk capital markets are saturated, (2) credit had nowhere else to go but to over-expansive consumer credit that was sustaining production, and (3) finally, the dollar exchange is coming down, which they may be calculating will make US products more interesting to foreigners.

But now is too late. The horse is out of the barn. The Fed has indeed been the creator of a huge business cycle distortion that they will not be able to cure without throwing the world economy into chaos.

Professor Bernanke, this has fallen upon you, and you're not the guy for the job of biting the bullet. Get out while the getting's good if you don't want to take the blame for Greenspan's mess. Either you have to take this excess liquidity out of the system (and when you do, you'll cause an investment crisis involving many banks), or you have to allow the situation to get worse by not doing so (and you'll have CPI inflationary pressure that will conflict with your methodology, messing with your calculations and with your mind, never mind ours.)

Now, I'm just a gadfly. So, if there are any economics gurus reading this, please translate the above into academic jargon and pass it on to Professor Bernanke and his buddies. After all, they'll never listen to someone as one-cellular-brained as I, but you -- now that's a different story.

Wednesday, May 10, 2006

Take Me To the Funny Farm

Just when you thought you'd heard the craziest mortgage scheme, along comes the 50-year ARM. (CNN article)

What is the US financing industry coming to? Where is the Fed when you need them? Why aren't they policing the banking industry instead of trying to micromanage the world economy by feeding the financiers with ready cash? Of course, we know the answer to both questions: They have a huge conflict of interest. On one side you have GDP and the upward maintenance of all these bubbles, and on the other, you have the little guy, who only needs someone to keep things on a steady course and fence out the wolves.

Guess which one gets sacrificed. Again.

[Thanks to the for this picture.]

Why Gold Isn't Just Another Bubble

Well, actually it is, to some extent. In other words, the central banks of the world have de-standardized the monetary units of their respective countries by taking them off the gold standard back in the 70's. But as I've said before and I'll say again, you can take gold out of the standard, but you can't take the standard out of gold.

Now, any solid asset tends to find its real value in a free market, vacillating up and down with the flow of speculative liquidity. After all, real estate, for example, tends to keep its "value" in the sense of "purchasing power," over the years, in spite of the bubbly ups and downs. (But remember, it's got a lot of expenses tied to it, like taxes and upkeep, that must be kept in mind when considering it as a store of value. And you can't always sell it at the right moment, so speculation is difficult.)

The stock market also tends to keep pace with inflation, when you think about it. In fact, over time, the price of any asset does tend to find its level, no matter what nonsense goes on with the measuring stick that is the monetary unit of a country. (And much nonsense there is, but I've discussed that in my earliest posts. Go back to the archives and read through chronologically, starting here, at the bottom of the March 2005 archive link.)

And gold and silver both walk and talk a lot like bubbles. Theodore Butler over at has written some interesting allegations about speculation in gold and silver, notably how Buffett may have lost his silver spurs in the derivatives market, and how Barrick may have fudged some accounting. So it's true, gold and silver both can look like just another bubble.

[Thanks to for the photo.]

But believe me, there is only one element in this world that can stand up with pride and be called money and a great store of value, and that is gold. (Why? Read my archives.) Yes, gold will go up, and gold will come down, but the mean value of gold is what I consider to be the truest measure against which we can compare all of the inflated monetary units of this world.

What is that mean value today? Some experts put it at $600. Some put it as high as $1,000, or more. I will say that it depends on the market, and we will see within the next few years, after all of this hysteria is finished doing its havoc.

If you ask me, gold should find it's rightful place back at the center of global monetary policy. The only reason it fluctuates so wildly today is that it is sitting on the fence. The market loves it as a hedge against inflation, but the central governments refuse to recognize this intrinsic role of gold in any official capacity.

I would love to see our governments take up where they left off and permit the use of a metric account unit of gold in all transactions, especially international ones. It would save us a lot of grief all the way around, and it's feasible. Perhaps it could even be done already; all we need is some courageous global players to start the ball rolling.

But who's listening to me? And anyway, treasury politics, big hot paper money, and gold as a monetary unit don't mix.

Tuesday, May 09, 2006

Oh, So You Mean I'm Not the Only One?

Gold has hit $700, and I don't think the party's over yet. And I'm not alone.

Jim Sinclair of has been touting gold for years, according to the New York Times -- What?? The NYT is talking gold? Wow.

[Thanks to and the NY Times for the photo.]

If the New York Times is starting to talk about gold, then I guess that's proof I'm not just making this up. This article describes his ideas along with those of several other gentlemen who might be described as gold bugs. (I am certainly one.) It also mentions the American Institute for Economic Research, the entity founded by my father, Edward C. Harwood, and which started recommending gold-related assets to investors all the way back in 1958.

This reminds me of the 1970's when my Dad was written up several times in various newspaper and magazine articles because of his views on gold. I've hung onto his words ever since, and all of the stats I can unearth confirm every word he said.

Monday, May 08, 2006

A Taller Yuan: A Good or a Bad Thing?

My friends over at China Law Blog have asked my opinion as to "whether the U.S. would be better or worse off if the Yuan [were allowed] to float and, presumably greatly appreciate."

I'm glad you asked. (Any excuse to bloggiate.)

My answer is: That depends on whether you care about the immediate (read short-term) effects or the long-term ones.

Obviously, if the yuan floats, it goes up, and the dollar goes down, which I believe would only give a more truthful reflection of long-term reality. But just as obviously, both China and the US are profiting short-term from this pegging, in spite of all of the jaw-boning. China is raking in the dollars for cheap exports, and the US is getting a low CPI with a cute angelic halo around Greenspan's (now Bernanke's) head to help camouflage the Fed's misguided "economy-rescuing," credit-pumping, bubble-blowing activities.

[Thanks to for the image.]

I watch the yuan chart on a daily basis, and it's absolutely mind-boggling and very unique among foreign exchange charts. What would be the immediate results of an unpegging? Havoc in the Chinese export industries. But it's also the end of the party on the other side of the Pacific.

Chinese companies will have to slow production in compliance with receding American demand, we know that; but do we also realize that America will have to come to terms with the resulting increase in prices and (here's the rub) the increase in our all-important CPI inflation rate -- a bogus figure if there ever was one, but nonetheless an instrumental one with regard to our monetary policy?

The second ramification would be havoc -- or further havoc -- in the Chinese and our own speculative asset markets. If I understand correctly, much foreign investment has already found a home in China just waiting for such an appreciation, so much so that the Chinese government has felt the need to take action to suppress it, in order to avoid undue asset inflation and the damages such as those done to the Icelandic economy when all of the speculative money tide left its shores. American money probably makes up the bulk of that speculative activity.

The third problem has to do with worldwide confidence in the dollar. As the yuan increases in value, the dollar sinks, and along with it all dollar-denominated assets and investments; and I don't think it would sink only respective to the yuan. The exchange markets, like all markets, are easily spooked, and a sudden dollar drop might topple us all into a flight away from it.

On the other hand, all of this is going to happen sooner or later, in my opinion; it's just a matter of time and speed. It may appear as a flight from the dollar, as a walk away from the dollar, or as a relatively unnoticed drop in the foreign exchange rate of the dollar without any repercussions on the internal economy -- although in this internet-investing day-and-age, I can't believe it would happen that smoothly.

Bernanke wants desperately to control this American economy. He doesn't want a yuan problem messing things up. He's already got a Catch 22 on his hands: If he raises rates, he'll put the squeeze on the American credit-bloated consumer. If he holds rates steady, he's sending the signal that the Fed will no longer pursue its corrective activities, which might send bonds plunging, the Dow into another roller coaster ride, and gold off the charts.

Whatever the Chinese decide and/or can do, I believe the dollar is overvalued relative to the amount of purchasing media in circulation; but I also believe that the world is not quite ready to move on to some other currency. Where else would you go? (Except gold...)

All of this is moot, of course, as long as China can hold onto their yuan. To date, they have expressed no intention of letting go, in fact quite the contrary. China Law Blog gives us some good insight into the reasons for this; see here.

Sunday, May 07, 2006

Central Banks Changing Course (Except the US Fed)

Just learned this from Doug Noland over at Prudent Bear:

[Thanks to for the photo of the Chicago Fed.]

"May 3 – Bloomberg (John Fraher):  'Otmar Issing is coming into fashion -- just as he prepares to retire as chief economist of the European Central Bank.  Issing, 70, who attends his last interest-rate meeting tomorrow, argues that analyzing the flow of money through the economy helps central bankers identify asset-price bubbles. His view is attracting greater attention as property, stock and commodity prices surge globally. "Times are changing," said Thomas Mayer, chief European economist at Deutsche Bank… and a former researcher at the IMF.  Issing’s philosophy "is gaining more support among a broader audience." In Japan and Sweden, central bankers are adopting policies echoing the ECB’s focus on the inflation threat posed by money supply and credit growth. The Bank of Japan’s monetary policy review…pledged to gauge "longer run" risks to inflation. Sweden’s central bank last month conceded it "cannot ignore" the risks posed by an increase in loans. Interest in money supply "is on the rise," said Jim O’Neill…chief global economist at Goldman Sachs… "Without it, there’s a risk of underestimating the consequences of asset prices and their impact on further monetary policy." The U.S. Federal Reserve is the most prominent holdout from Issing’s view: Chairman Ben Bernanke says that policy makers shouldn’t use rates to interfere with the markets…' "
Read Doug's whole article.