My brother called a couple of days ago. His wife has $100,000 to invest and he wanted to know where I thought I should put it. I’ve made recommendations in the past and they’ve always made money; which I feel puts a bit of pressure on me because each time I feel I’ve got to live up to my own record.
It’s also tough because the investment market is so screwed up with the recent actions of the Federal Reserve. In the 1800s, investing was pretty simple, you just put your money in bonds and forgot about it. Since consumer prices went down for most of the 1800s (with the notable exception being the war-time inflation of the Greenback fueled Civil War) the return you received on bonds would be in addition to the additional purchasing power the money itself possessed. Few people invested in the stock market in those days; it was seen as a shady place where individuals like Jay Gould, Cornelius Vanderbilt, and Nathan Rothschild could use their deep pockets and insider information to force a stock price to be whatever suited them at the time. A stock exchange was more casino than sober investment house. Bonds were where the common man should put his money.
Lately I’ve been reading opinions about the market that tell their readers not to be too worried about inflation. Sure, they’ll admit that expanding the money supply correlates sharply with inflation, but they tell me that Ben Bernanke will take all that liquidity out of the system when the time is right. I have no idea where they get this idea; Alan Greenspan certainly wasn’t able to contract the money supply after he inflated it to ward off recession. Do we really believe that Ben Bernanke is going to do any better?
One opinion I read indicated that mopping up inflated money supply. After all, all the Fed had done was monetized the government’s debt. Since that debt is held in the form of US Treasury bonds, it should be easy to contract the money supply again by simply selling the bonds. The author of this opinion was rather misinformed, because they did not seem to understand that when the Fed monetizes bonds, it does so with money that it yanks out of thin air. The money then enters the system by way of the bank. Continue reading Can the Fed Tighten the Money Supply in Time?
Here’s a fun tidbit from our friends at the Federal Reserve, out economy is not going to be getting any better this year. When last they spoke (oh, gosh, must have been.. four weeks ago) they said that the best we could hope for would be an economic recovery in late 2009. Now they’ve since come out and said that we would see no recovery this year.
Hmmm. Well if that’s the case, why is the government spending all of this money to “stimulate” the economy and bail people out? Was that to speed us to a swift recovery? Now I understand that back before the days of the Fed, when downturns or banking panics would happen, that they might take a year or so to work themselves out. The Panic of 1907 took less than a year. The Panic of 1893 didn’t see the market bottom for more than a couple of years. But that was back in the economic dark ages. Back when our money was backed by gold and we didn’t have sage bureaucrats or wise central bankers ready to print money at the drop of a hat (roughly $13 trillion and counting according to Bloomberg) to bail everyone out. Why, wasn’t the whole reason for all of this stimulus and bailout so that we wouldn’t have to far a protracted economic downturn?
Well, that was the justification given for it anyway. Liquidation doesn’t work is what Ben Bernanke told us, it just makes things worse. So instead let’s bail out the troubled economic actors and get back on the road to a quick recovery. The Fed is now admitting that this recovery of there’s is not going to come quickly. In fact, in comparing the amount of time old style economic liquidations used to take compared to take, the post economic recoveries of the Fed era seem to take quite a bit longer. As I discuss in my book, when you compare the economic history of the pre-Federal Reserve era to what took place after the Fed, it’s pretty clear that we went from an era of frequent economic panics to infrequent economic collapses. That suggests that all the Fed is doing is to postpone an economic downturn until later, but at the cost of greatly adding to its length. Which isn’t really all that great of a service to society when you think about it? Continue reading Fed Sees No Recovery in 2009
Well, I’m beginning to get clients seeking my investment recommendations. I think a lot of the investment advisory business is driven by what advisers can profitably sell, and not necessarily what’s most lucrative or best for the client. When you’ve got your country’s central bank working hand-in-hand with your government to inflate your money supply by trillions of dollars in high-powered money (this year alone), holding physical gold and silver becomes a must.
There are many investment vehicles available for purchase that allow you to participate in the appreciation of the Comex gold price, but they also all involve some form of counter-party risk. The beauty of gold ownership? It’s a form of wealth that isn’t someone else’s liability. This is important, and lose when purchasing gold through an intermediary. Part of the reason most never bother to learn investing or money management is that it’s made artificially complicated by the profession of accounting, as well as the pseudoscience that is Economics. The average person wanting to learn about money is bombarded with terms they don’t understand and notions that make little sense; my favorite among them being that the Fed is there to protect the value of the US Dollar by making it gradually worth a bit less each year so that, as a nation, we may prosper. Such bizarre statements defy rational explanation because they just don’t make sense, which in turn confuses people who are ready to soon seek comfort in the blind belief there are experts out there who do understand this arcane esoterica, and they’re better off just placing their faith in them.
Of course, they would be mistaken. The foundation of the modern American financial system rests securely upon this ill-placed faith in experts being able to manage what we as individuals cannot begin to fathom, and soon don’t even want to try. Knowledgeable central bankers manage the currency so as to allow smart, capable CEOs to grow the bottom line while accountants and regulators ensure that everyone’s playing by the rules. Every era has a mythology that holds it firmly together; this view of our financial system seems to be ours. The trouble (for those in power, that is) seems to be that in recent times, these myths are being exposed for being just that: myths. Continue reading An Inflation Survival Kit
The United States and the United Kingdom are both pursuing similar strategies to deal with this global recession: print more money. France and Germany are taking a rather different track and talking about reducing government spending. Germany went so far as to argue before the last G-20 meeting that if it were to reduce itself to “stimulus” spending, then it would become a burden on the rest of Europe; their reasoning being that they would eventually have to raise taxes to pay off their increased debt load and that that would cause a drag on the rest of the European economy.
It looks like Keynesianism isn’t a huge hit in France or Germany, as they are managing to avoid the peer pressure of their deficit spending neighbors. I’m sure Helicopter Ben is calling them up saying, “Come on! Everybody’s doing it.” But no dice. In fact, the President of the European Union Mirek Topolanek recently came out and called Obama’s plan to get us out of the recession a “road to hell“.
f Roger is right, and the banks are no longer able to function as the traditional engine of inflation, then I’m sure Ben is prepared to either go around them to offer credit to consumers directly. Such a scenario could take place in a variety of ways, with the most likely being that Fannie Mae and Freddie Mac start offering 4% 40 year mortgages and refinances straight to consumers. Since both of these lending institutions have now been nationalized, relatively few people would need to be involved in that decision. Fannie and Freddie create the money to give to consumers, and the Fed buys the notes. Voila, inflation.
will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt.
At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent…
The Fed also said it will buy more mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to help that battered market. The central bank will buy an additional $750 billion, bringing its total purchases of these securities to $1.25 trillion. It also will boost its purchase of Fannie and Freddie debt to $200 billion. Continue reading “Helicopter” Ben Starts Printing Up a Storm
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.
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
I started a three part series “Exploring the Myths of the Consumer-Driven Economy” a couple of days ago, and I intend to get back to that. But yesterday was a day full of events that just demand comment. Ben Bernanke gave assurances and the recession might end this year, and it sent the stock market up and gold solidly down. Then later that day, Barack Obama addressed the nation and reaffirmed what Newsweek had already declared on its cover. We are all Socialists now.
It was a long hard road to get America here; we have a strong tendency towards individualism and an inherent distrust of the powers of government. At least, we used to once upon a time. Not anymore. Now we have to depend on the powers of the state to correct the excesses of the free market, and we can not rely on the forces of free enterprise to get us out of this crisis. It is only through the intervention of government that we can put this crisis to a end. Or, in the words of our new President:
Helicopter Ben testified before both houses of Congress today and that the recession might end this year. It appears that these comments sent the stock market up over three percent. Citigroup, which has been circling the drain over fears that the bank would require nationalization that would wipe out share holder value gained over 21% because Ben said that the US Government would not need to take such action. Gold fell to around $950 an ounce and, most mystifying of all to me, Barrick Gold (ticker symbol=ABX) and fell over 11%.
Wow. That must have been some speech. It’s hard for me to imagine Barrick falling 11% because Ben said the recession “might” end in 2009. After all, even at $950, gold is still close to its all time high. I guess people were figuring that, if the recession ends, gold will no longer be in demand. Therefore, the price of gold should fall, and Barrick will not make as much money.