Price Shock II: M&Ms Pack hits $2.29!

In January of 2011, I published a blog about price inflation using my personal index, which is the package of M&Ms.  I was shocked that the cost had reached $0.99, especially remembering having to pay $0.05 when I was a kid.

Eight years later in March of 2019, I checked out the purchase at my local grocery store and was shocked again to see that it has now risen to $2.29 for approximately the same size package (although I'm not being overly scientific about this).

So I conclude that it is time to update my chart.  I'll allow the reader to reach the obvious conclusion about the value of the dollar in recent years.

For those of you who enjoy math, that's well over a doubling of the price in ten years.  How can it be that official price inflation numbers would indicate the price should be more like $1.50?

From AIER.org Cost-of-Living Calculator,
found here

Perhaps this uptick is a very recent phenomenon, and the chart doesn't yet have the latest figures in its database.  But whatever the reason is, I find it intriguing.

The Dollar: Biggest Moral Hazard of Them All

Please click here to see this article.

Thanks, Bernanke, but I'll Take What You Do Over What You Say

Bernanke has taken up the Volcker challenge and has decided to change tactics.

He is now going to defend the dollar, if we can believe his latest declarations.

Apparently he thinks talking about it will do the trick, i.e. shape market expectations and prevent inflation from taking hold over the longer term. In other words, he's learning how to jawbone, like any self-respecting Federal Reserve Governor should.


[Thanks to 24hourmuseum.org.uk for the picture.]

Jawboning is the Fed representatives' technique of influencing speculators and other market participants so that markets move in the direction the Fed desires.

But this will not be enough this time around.

As this excellent editorial in the Wall Street Journal points out so clearly, words alone will not do the trick at this stage in the game. The world has lived through too much political mirror-speak to believe everything our government or its representatives say.

We have seen nothing but dollar trashing over the last several years. Nothing in the Fed's actions to date confirms that the Board has any intention whatsoever of doing what is necessary to stop the decline of the dollar's exchange value and purchasing power. Quite the contrary.

There has been a loosening of the credit spigot and an assumption of moral hazard to an extent never before seen in history. The road backward is a long, exhausting haul that no political animal would undertake without extreme force.

So what do we learn from all of this jawboning? Markets learn; but Fed officials apparently don't.

G7 and Paulson Jaw-Boning About the Dollar

If Paulson's past statements are anything to go by ("The US believes in a strong dollar [snigger, snigger]"), you can bet the dollar is headed for lower territory.

According to this article in the Wall Street Journal, the G7 have decided to complain about the dollar's poor performance.

What neither the article nor Paulson tells us is that the Federal Reserve and/or Treasury Department and their agencies have been purposely trashing the dollar over the last few years, in a misguided effort to pump up the US economy a la Keynes, and more recently to reverse the trade deficit. (See this previous post for the details on the Peterson Institute's activities in this regard.)

Only problem is: (1) They keep stating simultaneously and hypocritically that America believes in a strong dollar, just as they trash it some more; and (2) the weaker dollar they wanted is not curing the trade deficit after all, because we're a nation of net importers and their dollar trashing is--*duh*--raising the prices of our imports.

So just because they've come out today bellowing that "that's enough! The dollar has gone down below out tolerance level" doesn't mean that they mean it. This jaw-boning will probably have limited effect. After all, they're not magicians.


[Thanks to buycostumes.com for the photo.]

The Resurrection: Lawrence H. White Defends the Gold Standard

It's time to break out my mantra again:

You can take gold out of the standard, but you can't take the standard out of gold.

How many times will I say this before the world hears me? Probably many, many more, if ever.

Finally, someone in the mainstream economic community has taken up the cry to resurrect the gold standard.


[Thanks to Allposter.com for the image of Caravaggio's Resurrection of Lazarus.]

Lawrence H. White, Adjunct Scholar at Cato, has just published this paper on gold and the gold standard.

I have written so much on this subject that I would be repeating previous posts to delve into the reasons why I support gold as a standard for modern monetary units. If you use the search feature above and look on this blog for "gold standard" or just "gold," you'll find dozens.

Please read Professor White's paper. An understanding of the principles he evokes is essential for the future economic stability of the world. And that's not an overstatement.

Will the politicians and power brokers take heed of the message? I don't think so; at least not yet. But they may be obligated to do so at some point if the public insists enough.

The history of gold is undeniable, and its future role--indeed its present role, albeit an unrecognized one--is just as undeniable. It's not because the monetary authorities have decided to uncouple gold from our currency, that gold does not retain its value as a measuring stick of their management shortcomings.

Gold is near an all-time high today. Many people in the world think as I do, that we humans need a measuring stick to manage out monetary unit. Until our leaders recognize this, expect gold to be the best store of value and to come back into favor as the currencies of the world are devalued through mismanagement.

Unfortunately, nothing in our modern age allows us to do better than the Romans or Greeks, or Medieval or Renaissance governments. Not the computers, not the modeling, not the statistics, none of it. Gold is on the level of the invisible hand. It is just there and will always be there to shine a light on our politicians' hubris.

Gold: Not Such a Barbarous Relic After All

Anyone who has read my posts for a while knows what I think about gold, for example here, here, and here for the three most recent examples.


[Thanks to Kitco.com for the snapshot of gold's rise to $868 today. Click on the image for a larger version.]

I guess I'll once again give you my mantra, because it always bears repeating:

You can take the gold out of the standard, but you can't take the standard out of gold.

For the uninitiated, let me explain. For several centuries, your money was closely linked to gold, and governments helped to maintain its exchange value. Today, this is no longer the case, and your dollars and your pounds and your euros, yen, or whatever, are floating on an international exchange market with nothing to tie them to anything of value except market competition.

As an aside, economic theory states that markets should be free to determine the value of things; but economists make a huge mistake when they proclaim that money is such a thing, a commodity that will be controlled by a market.

Money is not a thing of relative value. It is an intangible, a kind of contract, a promise to pay; and a promise to pay is no longer a promise if its value is allowed to fluctuate or fade away. It's the equivalent of saying that the length of an inch is determined by the market. This is nonsense. But I digress; I will discuss this idea in some other post.

Today, I'm watching the Kitco gold price reach, maintain and beat its last all-time nominal record of $850. As I do so, I can't help but remember Keynes's famous quip about the gold standard being a "barbarous relic." I looked up the exact phrase in a search engine, and I fell upon this great piece by James Turk. It's about the role of gold, the "relic" quip, and the future of the dollar.

Turk makes one of the best cases I've ever seen for allowing gold back into some role as currency, if only as a parallel means of exchange to the fiat ones we have at our disposal presently.

He worries me, however.

His ideas are right on. He points out that it was the gold standard, and not gold itself, that was the true object of Keynes's scorn; and he correctly blames the central banks of the world for our current financial turmoil, because of their --most hypocritical-- intervention in the money markets in a futile effort to control prices and the economy.

The fact that they cannot succeed at this mission, for reasons I have mentioned here, seems not to concern them; nor does their role in assuring that the dollar will follow all its fiat predecessors down the drain of monetary history. Perhaps they console themselves with the idea that the dollar will not be alone.

But Turk worries me not because I think he's wrong; he worries me because I think he's right, and because his wonderful idea of using gold as a means of exchange and as currency (i.e. as legal tender, although he seems to be carefully avoiding that expression), could get him into trouble. Why? Because he is striking too close to home: He is jeopardizing the very existence of the central banks.

Merely reinstating gold as legal tender (see his website) would go a very long way to solve many of the monetary problems we have run into of late--things like the current account deficit, the government's own budget deficit, and the waste and damages incurred by currency and asset price speculation of the kind that got us into the housing and credit market messes.

Personally I think simply allowing gold use as payment of debts public and private would demonstrate to an important minority of the world's population (i.e. the balance-of-power minority) that gold works better than paper money, and after an initial adjustment period, it might even displace our fiat currencies.

But it would also make clear to everyone just how much governments and speculators profit from the fiat currency machine, and governments don't like to be caught doing that. Look what happened to Bernard von NotHaus and his Liberty Dollar?

Mr. Turk, keep your eyes and ears open for the guys and gals in those somber jackets with the lettering on the back. The central establishment is not going to like you if it turns out your predictions about the dollar are correct.

As to where gold is headed, we must look at the inflation-adjusted charts for the real gold price over the years. In 1980, gold hit $850. In today's dollars that is something like $2,100. (See the chart here, and another one here.)

We are nowhere near the 1980 gold peak (or the dollar trough, if you prefer), because back then the 1970s inflationary crisis and abandonment of the gold standard had an explosive effect on the speculative price of the metal (and/or on the speculative loss of value of the then dollar).

What we might call the "real price of gold" (i.e. the real gold value of the dollar), once all is said and done, will probably be, grosso modo, (1) something between $600 and $1,000, assuming the dollar retains its reserve currency status. This, however, is becoming less and less of a sure thing.

If the dollar loses that status, then (2) the real value of the dollar will likely be somewhere between $1,500 and $3,000 an ounce of gold, at present gold supplies. (For an explanation of these figures, see the fascinating booklet entitled "Prospects for a Resumption of the Gold Standard," a collection of essays from a conference at the American Institute for Economic Research in 2004.)

Hey, Foreigners Holding Devaluing US Dollars: US Assets for Sale

It looks like Citigroup has found a white knight to save their skin, in the person of the Abu Dhabi's national investment fund. According to this article at the International Herald Tribune, Robert Rubin himself went over there to get on his knees and beg them to save the company. (I think I'm exaggerating, I hope I'm exaggerating,....)


[Thanks to homeschoolstudentplanner.com for the image.]

I feel like we're living in an Alice in Wonderland kind of reality. You see nothing on the surface; but behind that mirror, there's a whole lot of strange things going on. Sure, unemployment is still under 5 percent, but behind the scenes Wall Street is scrambling, the Dow is jittery, gold keeps testing its nominal high from back in 1980, investors are fleeing to bonds, and credit derivatives are reaching an all-time high (a speculative strategy that wagers on price movements in both directions for all kinds of things, and that are presently betting someone is in for some huge losses).

Countrywide has resorted to borrowing from the semi-government banks to save its skin, the English bank that had lines out its door a few weeks ago is now considering a merger with the Virgin Atlantic people, the economic community is split about our future: either we're headed for a recession or everything's just fine ... all this while we go about our business drinking our coffee, going to work and pulling out the credit cards like nothing was happening.

Yep, the big banks are in trouble, and they're trying not to show it. Meanwhile, the Fed will probably have to lower its target rate in December, contrary to what they said earlier; and this means that the dollar will tank even more.

Holding dollars, therefore, is no longer very interesting from an investment point of view, and large investors are diversifying. One of the things they do to diversify is to buy assets that have a dollar price tag. That way, they can get rid of the silly paper they're holding that is worth less and less, and they get something real in its place. A hefty share of Citigroup is one of those things. We should be seeing a lot more of this (i.e. foreign purchasing of American assets) before all this blows over.

I guess Congress will think twice about questioning this sale to the Saudis. Remember the port deal that fell through? Now we're thanking our lucky stars those same Arabs are still in the game.

Response to a Synical Swiss About the Dollar

Over dinner a few weeks ago, I was discussing the falling dollar with some friends, among whom was a Swiss economics journalist. He said something like, "But is the fall of the dollar really very important?"


[Thanks to TradingCharts.com for the chart. Click on it for a larger version.]

I piped up that surely it was, if only because the value of the dollar was a kind of contract, a promise to pay and, given its reputation, a promise to remain a good store of value.

He replied, "But I don't think the dollar is a contract anymore. Everyone knows that currencies are floating, and that they are taking a calculated risk when they hold or invest in them."

I was shocked, even though I realized that technically he is correct. The dollar--in fact all currencies--are based on nothing other than our faith in them. They fluctuate today; everyone knows it. Yet I continue to hold that a strong dollar is in everyone's interest, not only those who travel abroad.

I tried to illustrate the kind of damages that were being done, giving the example of Saudi Arabia, where America has the privilege of buying oil in dollars that are getting weaker and weaker, and because of old agreements the Arabs have nothing to say about it. The conversation moved onto other subjects.

Today, I read this article in The Economist. The following sentence jumped out at me:

"The dollar's decline already amounts to the biggest default in history, having wiped far more off the value of foreigners' assets than any emerging market has ever done."

This speaks for itself, and somehow it carries more weight, coming off the black and white pages of a well-known economic magazine. I hope my Swiss journalist is reading it, too.

FBI Raids Liberty Dollar: What The Hell is Going On?

Ron Paul has been talking up the gold standard for years, and early this year a fellow named Bernard von NotHaus decided to honor him by creating a--well, let's say a "coin-like object" called the Liberty Dollar with Paul's likeness on it. The price for this one troy ounce silver--ah, "piece" is $25, of which $5 is going to the Paul campaign.


[Thanks to libertydollar.org for the image.]

Apparently, someone over in Big Government doesn't like this idea. Watch this fun video from TheStreet.com for a run-down:

Liberty Dollar Video

I find this rather scary. What could be illegal about creating a collectible--oh let's just call it a medallion? Is it the campaign angle that the FBI didn't like? Or is it something Mr. von NotHaus did?

Well, yes, if the government is correct. According to TheStreet, the raid was "aimed at stamping out an illegal currency."

Here's more on the story from the Associated Press. From this article, we find out that NotHaus is the "founder of the National Organization for the Repeal of the Federal Reserve Act & Internal Revenue Code."

Further down in the article we read this:

"The organization, which is critical of the Federal Reserve, has repeatedly clashed with the federal government, which contends that the gold, silver and copper coins it produces are illegal. NORFED claims its Liberty Dollars are inflation free and can restore stability to financial markets by allowing commerce based on a currency that does not fluctuate in value like the U.S. dollar."

Now, there's a claim that's difficult to prove in today's economic environment. Silver and gold have both been all over the map since 2000 and even before. But that doesn't disprove his underlying thesis, in spite of this apparent inconsistency with reality. (More on that in another post.)

The article says that his organization "has produced an estimated $20 million of its own paper currency in the past two decades, claiming its $1, $5 and $10 denominations were backed by silver stored in Coeur d'Alene, Idaho." Eight months ago, he also "filed a lawsuit in federal court in Evansville seeking a permanent injunction to stop the federal government from labeling the Liberty Dollar an illegal currency."

Apparently, that didn't work.

NotHaus seems to be sacrificing himself for a fight. He's definitely the David trying to irritate Goliath to prove a point--one that is well taken, if you ask me. I applaud this endeavor; but I'm not sure he's going about it in a way guaranteed to win, or even to solicit public support, and even if he takes it to the Supreme Court. That doesn't mean his premise is immoral, or that it's not desirable to change our present laws regarding legal tender.

Other attempts to use private money, whether coined or paper, are going on at the moment. However, the government has raided or challenged none of these. Obviously, von NotHaus has struck a nerve. This case deserves watching closely. We'll have to wait until the courts decide who is overstepping the bounds, NotHaus or the feds. What seems certain is that NotHaus has gotten the fight he was aiming for.

Here's another article on the subject.

Gold Nearing Nominal All-Time High

Take a look at this Kitco graph to see gold fly up and away.

Time again to repeat my mantra:

You can take gold out of the standard, but you can't take the standard out of gold.

Historically, gold has been a barometer for the value of our monetary units, whatever they are at the time; and today is no exception. By rising to this level, gold is signaling to the world that all is not right with our monetary units, and especially the dollar.

To be a little more cool-headed, we must look at the comparative price of gold after taking inflation into account. When we do that, we discover that today's $824 gold price is only about one-third of the price gold attained in 1980. The peak price of gold in 1980, expressed in 2007 dollars, is $2,145, according to this chart at www.inflationdata.com.


[Thanks to inflationdata.com for this chart. Click on it for a larger version.]

That means that the price of gold is nowhere near its peak of 1980, in real terms. However, its dollar exchange value has gone from the low $300s (in 2007 dollars) to $824 today. That movement is a signal that people are losing confidence in the dollar's future.

Compared to other currencies too, the dollar has been hitting some long-time lows. Against what they're calling the "synthetic euro" (a euro value estimated for that period before its creation), and the Canadian dollar, the US dollar is at its lowest ever.

Some economists say this doesn't matter, that the dollar may lose some prestige, but that this is a good thing in the long run; that it will help American exports, that it will re-equilibrate the trade deficit, that it will encourage domestic saving, and that the present strength in our economy will keep the system afloat with no major problems.

Other economists say that this devaluation of our currency is nothing less than legalized embezzlement, that it increases the price of America's imports, that it will soon appear in the core price level and inflation numbers, and that the banking and mortgage irregularities that went on for the last five years will cost us dearly.

What is certain is that experts can no longer say that those who control our economy haven't already stolen our purchasing power. I submit that the problems we are experiencing in the credit markets are a direct result of actions by the Federal Reserve to devalue our currency, even though that wasn't their first objective. (They did it in the name of "saving" the global economy.)

By lowering their rates and pumping credit into the system over the last 20 years, the Fed is directly responsible for the various booms and busts we have been experiencing. We may not yet have a rise in core CPI; but we have experienced disruptions. At first it was the hedge fund crisis of the 1990s; then it was the dot.com boom/bust cycle; now we're in the housing boom/bust cycle that is touching hundreds of thousands of households.

Economists cannot gloss over the pain of so many people--those who lost money in the stock market crashes of 1987 and 2001, and now those who are having to pick themselves up from some bad real estate investments--and say that it doesn't matter, that these people are worth sacrificing for the good of the global economy. Or if they're going to say that, I say shame on them.

What's Wrong with Core CPI?

Bernanke says the following in a recent speech:

"[A]lthough energy prices have been volatile, indicators of the underlying inflation trend, such as core inflation, have moderated since the middle of last year."

Yes, central bankers are watching core CPI at 2.3 percent, more closely than CPI itself, which is at 3.6 percent. (Source.) I disagree with their assumption that core CPI is a more valid measure of price movements and hence of the soundness of monetary policy.

Aren't they forgetting a principle of economics? As Milton Friedman has pointed out several times, people have a fixed amount of disposable income, and they can save some of it (at the moment, there is very little saving going on), or spend it. This means that the disposable income spent on stuff like gasoline, computers, health services, clothing, entertainment, etc., is a zero sum game.

In other words, when gas prices rise, and unless a consumer decides to cut down on gas consumption--and he doesn't always have this choice, he'll have to spend more on gas and will then have less to spend on other things (the core CPI items), which will put downward pressure on the price of those items.

If the Fed is reading core CPI instead of CPI, they are reading a distortion, i.e. only half of the story, without taking into consideration the pressure from the other half.

How easy was that? I just shot a hole through our Federal Reserve's monetary policy.


[Thanks to winsdartboards.com for the image.]

Citigroup Sees Gold Above $1,000

For the obvious reason (its dollar price just hit a 27-year record), gold is back in the news. As far as I'm concerned, it never went out of fashion, even though it did go out of the news.


[Thanks to midstateoffice.com and blogmd.samblackman.org for the image.]

Read this article by Jason Hamlin at Seeking Alpha. It quotes a Citigroup statement, in turn quoted by Ambrose Evans-Pritchard at the Telegraph.

For me, it's just what I've been hearing at the gold-bug websites for months; but to get it from Citigroup puts a whole new shine on it.

Remember my mantra:

You can take gold out of the standard, but you can't take the standard out of gold.

We actually have a de-facto gold standard, even though governments tried to take away their stamp of approval in 1971. It's just there; it won't go away in spite of the money managers' efforts. It will always be a haven for poor management of currency. And it looks like the managers are screwing up again.

Central banks have been selling their gold reserve stocks, but the people have been buying it up faster than the central banks want to sell it, or than the existing miners can mine it--and this in spite of the fact that physical gold pays no interest (on the contrary, you have to pay sales tax when you sell it), ETFs (physical gold funds) have management fees, and gold stocks pay very little dividends.

So why would people buy it? Because they fear the old Boogeyman Inflation is coming back to town.

How high will gold go? That depends on whether the central bank money managers can get their credibility back.

Can they? The answer depends on which writer you read.

Some are saying that the US dollar cannot ever drop out of favor as the world reserve currency, for the reason that the US is still the most ... well, if not free, at least wealthy and powerful capitalist market in the world (although Singapore, Hong Kong and Australia are stronger contenders in the freedom department, according to the 2007 Heritage Foundation Freedom Index).

And we don't know what the Fed will choose to do. It may not feel obligated to lower rates much more. If it doesn't, it would regain the world's confidence.

Others are saying that the Fed will continue to lower rates and pump credit into the system, which will cause another flight from the dollar like the one we saw in 1980. Eventually back then, the US straightened things out; but being as this is a repeat performance, this second time around the world could lose faith in the US capacity to stick to the straight and narrow any better than its nearest competitors.

As Evans-Pritchard says, however, the other relatively strong currencies (the euro, the pound, the Australian dollar, the Swiss franc, and a few others) aren't in much better shape and have problems of their own. So what we may get is a race to the bottom with currency devaluations (caused by excessive lowering of target rates) all over the world. In that case, the US dollar might regain its status through its comparatively quicker recuperative capacity; but that would be after a pretty nasty world event.

Fascinating times we live in.

Jackson Hole: Saving Us From Themselves

'As Nathan Mayer Rothschild was fond of saying, “I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man that controls Britain’s money supply controls the British Empire.” '

Interesting quote from this article at SeekingAlpha.com, by one of my favorite gold bugs, Gary Dorsch, blogger at sirchartsalot.com.

Gary's article points out some of the data you don't get from the dailies and makes my case look all the more scientific. (Gadflies can always use a little support.)

What I find the scariest element of our present quandary is that top economists, including 34 central bankers, are in complete opposition to each other on (1) the problem, and (2) the solution. Take a look at this article if you care to watch how our top-notch economic-scientist central bankers are scrambling for their next move.


[Thanks to thebestlinks.com for the image.]

Mishkin thinks that, due to positive "[r]apid financial change, triggered by innovation and deregulation", all this wonderful lending has simply "outstripped the available information sources"; and so he wants to lower the target rate. Feldstein of the NBER [National Bureau of Economic Research, the major supplier of much of the statistics available] sees the bad writing on the wall and agrees the Fed should lower it by 1 percent. Shiller decries a classic housing bubble and seems to want something to be done. Leamer warns about the coming recession. Fisher from Israel says do something about the bubble before it explodes.

Then you have Mayer flipping off everyone's worries, saying this whole housing-boom thing was simply a sign that it's now cheaper to own a home than to rent one. (Sure.) Others say that the bubble is simply an effect of monetary policy but not the cause of any recession. (Right.)

Bernanke himself walks the tightrope between one side and the other, saying the economy can handle this and maybe we'll do something, maybe we won't.

The consensus seems to be summed up this way: We'll have to "rely on judgment more than models." Okay. But whose judgment are you gonna pick? I admit there's a consensus that now is not the time to raise rates; but whether to lower or not (and/or pump more credit into the system), they're all over the charts but seem to be leaning towards easing/pumping.

I get the heebie-jeebies when I read that a year ago "the Bernanke Fed ... heavily inflate[d] the broad US M3 money supply, after it decided to hide the figures from the general public in March 2006. Since then, the US M3 money supply has expanded at a 13% annualized clip, up from 8% when the Bernanke Fed stopped reporting the key figure." (Look at the charts if you don't believe him.)

I thought they were holding money supply steady. Why would they increase it, when they've supposedly been combatting the inflationary pressure all this time?

And then I cringe again when I read this:

"[China] has been a net seller of US T-bonds for three straight months by a record amount of $14.7 billion, the longest period of sales by China since November 2000."

This is not the time for China to bail out on our T-bonds (although I don't think they really will, given the amount they hold.)

And this is an interesting quote:

' “At some point, you have to choose between trusting the natural stability of Gold, and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for Gold,” said George Bernard Shaw in 1928.'

GBS is not my paragon of economic virtue, but I like his occasional common sense and wit. I might just add that today the marketplace is more savvy and may have already factored in much of this wisdom. No one can really predict how things will play out. But we can take our chances....

And this:

'Should you place your faith in Federal Reserve notes? “Money is too important to be left to central bankers. You essentially have a group of unelected people who have enormous power to affect the economy. I’ve always been in favor of replacing the Fed with a laptop computer, to calculate the monetary base and expand it annually, through war, peace, feast and famine by a predictable 2%,” said Milton Friedman.'

He's another one whose gift of gab--indeed in his case genius of gab--got him places; but I note that he had the remarkable ability to say opposite things within the same paragraph. Here we have a committed devotee of small government saying both "power is bad" and "use the power anyway." Why not just be consistent and recommend we get rid of both the central bankers and the central bank (i.e. throw out the centralized computer, too)? Why can't we just let it all go and allow people to write contracts in gold? End of problem. (Perhaps an oversimiplification....)

Bernanke's job at the head of our monetary policy is an impossible one; but he wanted the job, so now he's got to at least pretend he can handle it. I don't envy him. The higher you fly, the harder you fall.

Bill Gross is Either Joking or He's Nuts

So he doesn't understand why the RFC (the Reconstruction Finance Corporation), RTC (the Resolution Trust Corporation), and his RMC (Reconstruction Mortgage Corporation) were/would be a problem. No wonder world finance is in such a mess.

His latest recommendation is for the government to bail out 2,000,000 hamstrung borrowers, just as they bailed out banks and almost bailed out a hedge fund a few years ago.


[Thanks to howlingdog.pwp.blueyonder.co.uk for the image.]

To bail out 2,000,000 unwise borrowers may sound like no worse an idea; but what he doesn't seem to notice is that it would signal the end of America as we know it. It would risk leading ultimately to an international monetary crisis of proportions that we cannot even imagine.

Instead, he should be yelling at the Federal Reserve and other central bankers who are responsible for this mess in the first place. He should be crying out that mismanagement of our monetary unit is at the source of this whole problem.

And just a detail: He says that "[t]he resultant impact on housing prices [if the government does nothing] is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression." Well, did he notice that housing prices have risen up to 300% in some cases within the last 5 years? Doesn't he realize that bailing out 2,000,000 borrowers will prevent these outrageous prices from deflating?

And what about tomorrow's borrowers, many of whom are responsible people who actually pay their mortgages? Their salaries are not about to rise 300%, so a bailout will just condemn millions of people to renting for years to come. (Maybe Gross has got stock in those companies who'll be supplying the rental housing?)

His shortsightedness is typical of the kind of thinking that got us into this mess in the first place.

A Clear Description of This Mess We're In

I like this article by "Average Joe." (See his own blog).

He lays out the scenario pretty much as I have here. The only thing I would add is the credit derivative layer above all this, which adds to the "spooking" effect he mentions. (This is just another layer of complicated financial finagling that is supposed to spread the risk even further, which it may in fact do, but it also adds to everyone's euphoria and ultimate insecurity, just as Average Joe describes.)

I think what is making this all the more spooky, is that some of the most sophisticated number-crunchers in the world (e.g. the Federal Reserve, the BIS, and all those analysts trying to decipher the stats) can't give us an idea of how deep and/or wide this situation is.

Some will answer that the market is handling this just fine, that the players in this game are very aware of the risks in the long run, and they have covered their butts, or if not, they will be allowed to fail. I answer that to believe this is to ignore the potential for disruption of world economic equilibrium and the LLR (Lender of Last Resort) role of the Fed and the US Government, upon which the markets are counting--and probably rightly so.

In other words, the high-rollers know that the US Government will not let the economy tank just because a few players took too much risk. This is what economists refer to as "moral hazard," i.e. a dichotomy whereby a market player's human conscience comes in conflict with his/her human nature.

To spell it out, bankers and financiers know that to take great risk is dangerous; but at the same time, some have the gambler's faith that they will beat the odds and/or that the consequences of their actions only involve themselves--or that they can count on the US Fed or Gov to bail them out, in which case it becomes quasi-criminal, but not prosecutable without a statute to hang it on.


[Thanks to gamblinggates.com for the image.]

We seem to be at an intermission in this show. Stay tuned. The Fed will probably try to resist action, to stay on course, and to let the system shake itself out of this, but I still believe they will be under pressure from government officials to either lower rates or perhaps inject cash into the system (which some number crunchers say has not happened yet, in spite of all the noise about lowered discount rates and repurchase-agreement cash infiltration).

If they cave to pressure, I would fear for the dollar and would see hope for gold to rise eventually, as speculators make a last-ditch effort to save their purchasing power. Beyond that, who knows what regulators and markets will do.

Bernanke's Transparent New Clothes

Once again, Doug Noland over at Prudent Bear has hit the nail on this head with this commentary on 7/14/07.


[Thanks to surpluselectron.com for the image. We may see some of those on the street some day pretty soon, if the dollar keeps falling like this.]

I'll quote him, because he says it as well as anybody:

'I’ll plead once again that the issues of “money”, Credit, and inflation are much too vital to the long-term health of free-market democracies to be left to a select group of policymakers and “ivory tower” dogma. I would instead argue that it is imperative that citizens become sufficiently educated on the perils of Credit inflation, financial excess, and unsound “money.” This would provide our only hope against the inflationary tendencies of politicians, the Fed, and the Financial Sphere – tendencies that turn highly toxic when mixed with high octane contemporary “money.” ...

"Dr. Bernanke states that, “undoubtedly, the state of inflation expectations greatly influences actual inflation and thus the central bank’s ability to achieve price stability.” He then reiterates the commonly accepted view that - because of the Fed’s ongoing commitment and success in fighting inflation - inflation expectations “have become much better anchored over the past thirty years.” Well, this may have been somewhat the case for a period of time, but it is foolhardy to believe it holds true these days. After all, seemingly the entire world prescribes to the view of ongoing asset and commodities inflation. And these expectations - in conjunction with liquidity and Credit abundance – provide one of the more highly charged inflationary backdrops imaginable....

'...the Fed can continue to downplay asset and commodities inflation at our currency’s peril. Both may be exerting only modest pressure on “core” consumer price indices these days, but such a narrow-minded focus completely misses the point....

'...a policy of pegging short-term rates with promises of fixating two eyes on “core” CPI and no eyes on asset prices/Credit/or speculative excess has been fundamental in nurturing history’s greatest Credit Bubble. Or, from another angle, relatively stable consumer prices have ensured runaway Credit inflation and speculative asset Bubbles.'

Right on, Doug.

See my previous post about the present situation, and this one about inflation and the mishandling of the word.

This is One of those Fulcrum Moments for the US Dollar and Hence World Economic Stability

What I mean by this is that the US dollar, and therefore the US economy (and therefore the global economy, and also--while I'm at it--gold and real estate and stock markets all over the world), are all holding their breath to see what happens in the following days and weeks.

Market expectations had been wishful-thinking a monetary loosening over the past year (i.e. a quasi-government-controlled increase in the availability of credit due to their confidence in the Fed's success in controlling inflation). But the Fed has done its best to convince players that there would be no such thing.

Because we all are skeptical of the Fed's word, ever since Forked-Tongue Al (former Fed Chairman Alan Greenspan) taught us that our monetary regulators needed secrecy to function, we still have trouble believing them; but ever since Ben Bernanke got into Al's hot seat, they have shown themselves serious about turning over a new communicative leaf through surprising forthrightness and clarity. They have simplified their sentences and acknowledged their shortcomings--at least many of the board members have, if not all.

The problem they still face, however, is at once simple and monstrous. According to their mandate they must control inflation, and at the same time they must not let the economy tank. This turns out to be very complicated, because they do not in fact possess tools efficient enough to exert good control over the money supply. Rather, they have only a negative, catalyst-like, clumsy, and belatedly-reactive influence on it, that tends to do more harm then good because of its unpredictability. (See my discussion in an article published at Prudentbear.com.)

And yet the credulous market players still want to believe in the Federal Reserve god. So here's the deal as I see it:

There are three possible outcomes for our economic equilibrium at the present conjuncture:

1. The Wishful-Thinking Scenario. The dollar rebounds (as it desperately wants to do), because the world has faith in the American "tallest dwarf" monetary management team (whether or not it deserves it). The wiser Fed continues to take a back seat, steering monetary credit on an even, transparent, and conservative course, perhaps even with the intention of phasing back their monetary role. At the same time, they step up aggressive action to defend the consumer against fraud, by curbing financial abuses like those that led to the recent subprime debacle and by pushing through and implementing BIS-originating capital-adequacy legislation. The dollar-instrument-holder stampede for the exit now taking place (mostly by trading partner central banks) proceeds calmly without overly affecting the markets, because the players somehow manage to agree to cooperate in making this a smooth transaction. Although the dollar continues its 2-5% "slow" inflationary descent to near zero, the smarter players have become accustomed to it and include this factor into their expectations. (I guess it's to hell with the little guys who don't know any better.) Gold slowly loses its luster and settles at around $400-$450 for the coming years, assuming there aren't any security scares. Oil drops back down to way below what everyone is expecting. Stagflation fears subside as housing and the rest of the economy pick themselves back up and trudge forward. All's right with the world. Well, who knows. Maybe.


[Thanks to spaceandmotion.com for the image.]

2. The Out-With-A-Bang Scenario. The dollar starts to rebound (see above) as players expect the Fed to manage inflation. The Fed, in reaction to pressure from the rising core CPI stats, increases rates just a bit. This show of firm willpower spooks the over-leveraged financiers. General interest rate increases speed up, putting the more fearless risktakers in jeopardy. US government bonds continue their drop (remember, their price is a function of general interest rates). The housing market recoils; home prices drop; foreclosures multiply. Consumer sentiment drops as their own credit costs rise. They slow spending. We're on a recessionary course. The dollar does a U-turn. Gold returns to being the safest haven and speculation pushes it to well over $1,000. The FDIC will step in to save some of the larger victims of the bloodbath. Who knows what the Fed will do then.

3. The Out-With-A-Whimper Scenario. The dollar's hint at a lift is a dud. The stampede away from the dollar picks up speed. The carry trade unwinds with a snapping sound. The economy continues its descent into stagflation, with the figures telling contradictory tales and the CPI continuing to play footsie with the Fed's "comfort zone." After a year or so, when unemployment starts to set in, the Fed loosens; and the dollar drops to superseding new lows. Over a few months, the US loses its status as the leading economy of the world, and the dollar is finally recognized for what it is: an unfulfilled fiat promise, just like all the others. We lose our monopoly on seignorage. Oh, and inflation starts up in earnest as the Fed scrambles for a solution. Gold rises inexhorably. Hopefully, we take our medicine a-la-1980s and go through another Reagan revolution, this time for good.

Now, if only I knew which one it will be.

How a High-School Dropout Made Millions in Sub-Prime Real Estate Lending

If ever the banking police needed an excuse to regulate the mortgage industry to death, Quick Loan Funding is it.

This Oange County Register article describes the amazing run of Daniel Sadek.

Read his story. It's an eye-opener. He went from Lebanese wartime high school dropout to real estate mogul multimillionaire to debtor in just a few years.

I respect his gumption. He grasped the American brass ring on the first try. The only problems were twofold: the ring was an exceptionally low-hanging fruit at the time, and he's incompetent, or immoral, or both.


[Thanks to dupagechildrensmuseum.org for the image.]

But that's what happens when an inflationary bubble works its way through the market system. Incompetence and immorality are rewarded. Money seems to be growing on trees -- indeed, money is growing on trees. Every Tom, Sadek, and Harriette can find easy dough to roll in with little or no effort or expertise.

After the Dot-com fiasco the mountains of cash still in the system turned to mortgage securities, encouraged by three things: (1) the Federal Reserve's lowering of rates in 2001, not for its direct effect on interest rates but for its signaling of more loose-cash times ahead; (2) the government-sanctioned mortgage-qualifying looseness of the GSEs (government sponsored entities like Freddie Mac and Fannie Mae et al.); and (3) the normal evolution of the securitization business. ("Securitization" is the packaging and marketing of various debt instruments like mortgage MBOs [mortgage backed obligations] that is now being done outside -- or at least at arm's length from -- the banking industry per se, thereby avoiding regulatory supervision to date. This is likely to change within the next five years, in my opinion, because without limitation of these products' use as credit collateral, the global economy is going to be in deep doo-doo very soon.)

This shift of excess monetary wherewithal was no surprise to anyone. Securitized bonds look like a good secure deal. Foreign central banks, global dollar investors and pensions alike moved billions into that market. In fact, there was so much cash available that credit became cheap for lack of takers, and vultures like Sadek (bless his innocent little heart) were allowed to go on a feeding frenzy.

Who is to blame? Not the vultures. Vultures are just acting like they are supposed to, i.e. like birds of prey. The real culprits are:

(1) Former and present US Congresses for enacting legislation to create and preserve market-maiming monsters like Freddie and Fannie.

(2) The governments of the US and of the other industrialized nations who participated in the decoupling of the dollar, the British pound, the European currencies, the Japanese yen, etc. from the price of gold back in the 1970s.

(3) The Federal Reserve and the central bankers of a number of foreign nations on several fronts:

- For devaluing our 1900 dollar from $1 to $.06 or less through ineffective efforts to "push the economy string" by inflating the currency, the latest episode being between 2001 and 2004; for devaluing the Japanese yen, most recently since the 1990s; for quasi-illegally supressing the revaluation of their currency by pegging the Chinese yuan and other nations' currencies to the dollar;

- For being fully aware, as the well-trained economists that they are, of the easing monetary effects securitization would have on money and credit, and for failing to do anything to set reserve standards for this wildcat bank-industry-clone that is presently threatening global economic equilibrium (the central bankers have now seen the dangers and are desperately trying to correct their mistake behind closed doors with the participation of the BIS [the Bank for International Settlements] before the messy situation hits the fan);

- For knowingly playing a chauvinistic international inflating game, pitting national policy against that of their respective trading partners in an attempt to favor their own industries and profit from currency imbalances come hell or high water (all countries are guilty of this, but most egregiously the Japanese, the Chinese, and even the buck-stops-here US. We should be making an effort to be the standard bearer of monetary policy instead of the tallest-dwarf bully on the block who gets his kicks watching the weaker sidekicks flounder around.)

I wonder if Sadek will end up like that Thai real estate "tycoon" we all saw on 60 Minutes -- you remember, the guy who took us on a tour of his semi--finished but abandoned gazillionaire's golf paradise. These days he's hawking hamburgers from his bicycle in the streets of Bangkok -- probably where both he and Sadek should have been all along.

Inflation or Simply A Case of Tight Supply?

Prices are rising. Oil hasn't come back down. Gasoline is at an all time high, and now it's starting to affect food.

California seems to be the first hit, with an annual rise of 5.7% of food prices. (Source.)


[Thanks to ag.state.il.us and the Energy Information Administration in DC for this reminder of the good old days back in 2002, with $1.35/gallon gas.]

The LA Times cites the Bureau of Labor Statistics's Patrick Jackman:

"We are going to see grocery store prices show one of the most rapid increases in the last 15 years or so," he said.

The article continues: "The real problem, according to food manufacturers and supermarket executives, is the run up in fuel prices and the cost of grain, which has soared as an ever-growing amount of corn is diverted to make ethanol to mix with gasoline.... Swanson said corn was the culprit for his estimate that food inflation will reach the 4% to 4.5% range this year, the highest since 1990. That's because corn is the building block for much of the American food supply. It is what dairy cows eat to make milk and hens consume to lay eggs. It fattens cattle, hogs and chickens before slaughter — depending on the animal it takes 2.5 pounds to 6 pounds of feed corn to produce a pound of meat. Corn syrup is the third-largest ingredient in Heinz ketchup and is the sweetener that goes into soda pop and hundreds of other food items. Corn also is the building block of the 7 billion gallons of ethanol made in the U.S. this year, a figure that is on its way to 14 billion gallons by 2011, according to estimates by Iowa State University.... As farmers discover just how golden corn has become, they are replanting fields formerly devoted to wheat, soy and other foods with corn, driving up the price of even more food commodities. Soy is up 28% to $7.41 a bushel from May 2006, DTN said."

Okay, so it's all tight oil's fault.... But wait a minute. What about the housing boom? Is that oil's fault?

"Oh no," some economists will reply, "the housing boom was created by revolutionary technological advances in the mortgage financing markets."

Hm. Don't know if I agree, but.... Okay, what about the booming prices for raw materials? All of them have skyrocketed.

"That's easy. That's because of the new global markets like China and India. Increased demand, that's all."

I say what about the fall in the exchange value of the dollar?

"The world thinks the US housing market will cause our economy to slow down, but the dollar will soon rise back up when they see things aren't so bad."

Maybe; maybe not. Then I say:

"What about today's huge corporate profits? Rampant corporate loans, and mergers and acquisitions? Why are they so high? And the financial sector? Why are they raking it in like never before? And if they're making so much money and there's so much global demand, why aren't corporations hiring like crazy, increasing salaries, and reinvesting in greater production? Could it be because they fear this is a monetary bubble and not an ordinary demand/supply scenario?"

Here, we get a silence. And I say to myself, "Because it is a monetary bubble."

Now, you the wage earner may say, "But when you come down to it, who cares? Prices are going up, and my salary isn't. What does it matter what is causing this to happen? I feel poorer already, and there's not a thing I can do about it."

True; for you it doesn't matter. But for the Federal Reserve, the fellows who are in charge of our monetary system and who are not supposed to create bubbles, this is a very crucial question. If the price increases are caused by normal economic factors like a limitation in the supply of oil, for example, then the Fed is not mishandling the money supply, inflation is under control, and the punctual price increases are a natural phenomenon that will take care of itself as energy producers respond to the increased profits by discovering and developing new avenues of energy production to their fullest potential. Then, once the new products are on the market, energy prices will decline, and so will those of products dependent upon energy and energy's raw materials.

Furthermore, because in that case the rise in prices would not be caused by a rise in general demand (which would be caused by a rise in your salary, and hence in your purchasing power, and hence in general demand for all kinds of things), but rather by a limitation of oil supply, the general price level would remain largely unaffected. Only those products involving petroleum raw materials and transportation would be touched. (As an aside, it would be interesting to do a study of which products' pricing does not contain some petroleum or transportation costs.)

However, if the Federal Reserve has been creating too much money supply, all prices will eventually rise and they will stay high on a permanent basis. This spells bad news for all of us, and our purchasing power in general will decline, our salaries will not keep pace until the very end of the process, those on a fixed income will be impoverished, savers will be punished, debtors will be rewarded, businesses will lose faith in their central bank, and GDP will underperform -- all conditions the Fed is supposed to prevent.

So if this rise in prices seems finally to be affecting more and more of the ordinary things we buy, how can we tell whether the driving dynamics are normal supply/demand or an inflationary bubble of the money supply?

I say this:

Maybe we can't; but if the Fed has recently been blowing hard and if the phenomenon swells like a bubble, if it rises like a bubble, and -- most importantly -- if it pops like a bubble: -- we'll know what it was, but only through hindsight.

Punchline PS: That's why the Fed and other central banks, if they don't want to take the blame for any damage done, should get out of the money supply management business.

Exports are Up: Will It Now Be A Fiat Currency Race to the Bottom?

An article today in the New York Times by Jeremy W. Peters tells us that the days of the current account deficit may start to recede in our memories pretty soon, because the falling US dollar has made American products and services more appealing to foreign purchasers.


[Thanks to all.blogs.com for the photo.]

The tone of the article suggests that a weak dollar may actually be a good thing, as contrasted to the "old days" when a strong currency was a sign of a country's economic health. As he says:

"Rather than hurting many American companies, a weak dollar is actually providing a strong lift. The exchange rate difference stokes profits from earnings generated abroad...."

'“The old notion that if the dollar’s bad, corporate profits have to go down is no longer correct,” said Howard Silverblatt, a senior analyst at Standard & Poor’s. “There’s a lot of growth going on in the rest of the world, and companies have to be there if they want to participate. There’s a lot to be sold.”'

'“What is clear is that even if the U.S. economy slows down, the rest of the world appears to be able to grow,” he said. “If you are able to sell to those parts of the world successfully, then you’re not tied down to one central bank, one economy.”'

So the message seems to be: Let's get that dollar down so we can become competitive.

But wait just a second. Aren't we forgetting something?

There is only this phrase -- "And there is always the risk that the dollar could suddenly plunge and set off a global economic crisis" -- to remind us that a stable value of a unit of currency might be important, that in fact global economic chaos could result from a lack of it, especially when it comes to the US dollar.

The other minor detail we are forgetting is that there are millions of innocent citizens, and even whole countries, who are depending upon a strong dollar. My heart goes out to all those on a fixed income, and all the emerging economies who have put a lot of their nest eggs into dollars and dollar instruments -- China, Japan, the Arabian oil countries, to name a few.

Now, I know that these countries should have known better and/or shouldn't have tried to prop up exports by manipulating their own currencies. In fact, we could say they started this whole game, except that the US has been doing it for almost 100 years. But that doesn't change the fact that you above-mentioned victims of inflation and devaluation, innocent or not so innocent, are collectively the sacrificial lambs in this story.

You are the ones who will have to put up with the disappearance of your savings and a reduced standard of living, perhaps even the collapse of your economy, so that companies like Caterpillar, General Motors, Ernst & Young, et al. can bring in the big profits from their cheaper exports. You are the ones who will have to put up with a 3 to 5% yearly increase in prices, i.e. with a 3 to 5% decrease in your purchasing power.

While the large economies of the world are racing each other to see who can devalue their currencies the fastest while keeping their respective populations from noticing the excessive inflation it takes to get there, you victims will have no voice in the matter. As my Dad used to say, "Prepare yourselves, little sheep, to be shorn."

I have said this before: The notion that a country can inflate their currency indefinitely and maintain a "low" (is today's 5% really low?) CPI at the same time is a crock full. At some point, some country somewhere is going to start a run for gold. At that point, the major economies' central bankers will have to either fess up or try to find a way to explain how their currency ended up with the losers in the trash compactor.