Month: March 2009

Worshiping at the Altar of the Inflationary God

“Bow down before the one you serve. You’re going to get what you deserve.”

– Trent Reznor

I listen to Peter Schiff’s weekly podcast “Wall Street Unspun.” He said something in a recent edition that stuck with me. He said that his father, Irwin Schiff (who was also a prominent opponent of the inflationary policies of the US Government) denounced the politicians and central bankers of the world in books such as The Biggest Con: How the Government Is Fleecing You. Peter said that his father described inflation as a “god that they worshiped.” These days it would seem there’s hardly any room left at the altar. 

The power of the ability to create money from nothing was marveled at when it was first discovered. Critics were sure that no one would accept Lincoln’s Greenbacks when they were first issued to help pay for the civil war. The notion that people would accept a paper money that had no backing just because the government told them to seemed rather dubious at the time, but the general public did accept them. The possibilities were not lost on the thinkers at the time.  If fiat money could be created with a printing press and accepted by the general public, then why not use the printing presses to make us all rich? Continue reading Worshiping at the Altar of the Inflationary God

A Market in Search of a Bottom

The Dow Jones Industrial Average is at 6625 as of this writing. The last time the Dow was trading in this range was 1997. Back then it was on it’s way up. The lowest level it ever reached in 1997 was on April 10 when it closed at 6391. If the Dow falls lower than that, then we’re going back 1996.  

Frequent readers of my blog know that I don’t follow the nominal value of the Dow Jones as much as it’s ratio compared to gold. The reason for this is that it the ratio of those two will automatically correct the Dow for inflation without referencing some wonky government statistic that has been worked over by “hedonistic price adjustments” until its lost its usefulness. In terms of the Dow-Gold ratio, the Dow looks far worse because $6625 would go a lot father in 1997 than it would today. The Comex Spot price of gold is in the neighborhood of $930; that would put the ratio of the DJIA to 7.1 ounces of gold. Last time we looked at the Dow-Gold ratio it was a 7.4. Last time it was that low it was the recession of 1991. The ratio is now trading belong its long term average, but it still has plenty of room to fall. People ask me when a good time to look at getting back in to the market is and I say when the Dow is trading at two to three ounces of gold. To paraphrase Dr. Seuss, “When we will get there, I can’t say, but I bet we’ll fall a long, long way.”

Continue reading A Market in Search of a Bottom

Obama’s Budget Attempts to Create “The Great Society”

The politicians and bankers of this nation have historically been quite content to enjoy the inflationary good times brought on by easy money; particularly if the deflationary crunch will happen on someone else’s watch. These days it doesn’t raise an eyebrow when the President announces a budgets that shows deficits as far as the eye can see, but that furnish a projection that the deficit can be cut dramatically cut in half a few years down the road… on someone else’s watch. Every President in modern history has done the same, and making excuses for our financial irresponsibility has just become part of the political process. 

By that measure, Obama’s budget is hardly a surprise. It has lots of government spending on pet issues while not making any hard choices about where to cut back in order to pay for it. Like other Presidents before him, Obama is promising that once the investments that his budget is making in this country come to fruition, that America will become a great nation once again. It comes as no surprise to anyone that Obama will be long gone by the projected time that these “investments” come to fruition and therefore he has no accountability in the outcome. Taking action that seems like a bad idea at the time, but claiming that history will show your wisdom in the long run is just part of being President. Bush did it so much you’d have thought that the historians of the future were his main political base.  So much of Obama’s budget just seems to be politics as usual. 

What does strike me as strange is the fervor and hype with which the Democrats are touting it.   Continue reading Obama’s Budget Attempts to Create “The Great Society”

Exploring the Myths of the Consumer Driven Economy: Part III

In the previous blogs of this series, I have laid down some basic fundamental definitions for things such as assets and liabilities. In the second post in the series, we saw how the banks serve as the inflationary engines of society, but that their activity does not add to the fundamentals level of assets in a society. Instead, banks expand the monetary base by creating and loaning far more money into circulation that they could actually deliver were their depositors to demand it; banks thereby create situations whereby there are far more claims to the amount of real goods in society then there are actual goods which leads to inflation.

As banks create and loan out money the economy booms, but it is an unsustainable growth. It is caused because the market misinterprets the source of the amount of money flowing into their products and services as a genuine increase in demand as opposed to simply a credit induced event. This leads business to expand their operations in an effort to make more profit, but the problem is that they are responding to false/credit induced demand as opposed to genuine demand. Eventually things have to revert back to fundamentals, and that is when the bubble collapses. 

Now lets take these tools and bring them to bear on our current situation. Continue reading Exploring the Myths of the Consumer Driven Economy: Part III

Exploring the Myths of the Consumer Driven Culture: Part II

In a previous blog, I defined the basic terms of economic analysis: assets, liabilities, debt, capital, and production. In the second part of this series, it’s time to introduce the complicating factors of the banking section.

As we defined last time, debt is a liability that must be paid from future production. Assets/savings are properly represented either by unconsumed economic goods; the reason we adopt this strict definition is because you can’t store a service and because we need to differentiate between the real savings of a society and money. If money is itself an unconsumed economic good, as it is with all forms of commodity money, then there is no difference. If, however, the money is issued by fiat, then it is functioning merely as a medium of exchange between members of a society who seek to exchange some of theirs production for the benefits of other’s production.

I’m sure astute readers will notice I’ve left services out of the above discussion. That’s not because they are not valuable, but only because they can ultimately only be paid for out of someone’s production. Sure, I may render a service to someone else who herself only derives income by way of providing services, but one can not base a society of services alone: real goods must enter the equation at some point or we’d all starve to death. That’s why I’m saying that ultimately, services must be paid for out of production.

Now enters fiat money into the picture. By law, it must be accepted as money, and it has a certain par value for the trade of goods and services. If the money supply is fixed at a certain level, then good and services should trade in fairly stable range; in fact, because technology lowers production costs, we should see money gain purchasing power of time. If, on the other hand, money is printed by fiat and injected into the system, then you will start to see price distortions. The price distortions will start in roughly the area that the new money entered the system, but over time it will cause an across the board increase in prices. This is because the purchasing power of each unit of the fiat money is being diluted by the introduction of each new unit of fiat money. Continue reading Exploring the Myths of the Consumer Driven Culture: Part II