On Wednesday afternoon, Treasury Secretary Geithner will deliver remarks and participate in a question and answer session with members of the Hamilton Fellows Program. The two-year developmental program provides experience, training, mentorship and networking opportunities and seeks to assist future Treasury leaders in the beginning of their careers. The Hamilton Project was founded by former-Treasury Secretary Robert Rubin.
In the evening, the Treasury Secretary will host a group of economists at Treasury for a discussion on the nation’s economy and outlook for future growth and employment. Expect the group to be nothing but Keynesians who have been as confused by this economy as you can get, as per usual no Austrians will be part of the group, despite the fact that the Austrians as a group included more economists that warned of the current economic crisis then any other group of economists.
Tuesday, August 31, 2010
The Puzzling Increase in the Cumulative Differential
A money manager has sent along a link to this chart.
But, it pays to have a strong network. I put out an email to five people who I thought might be able to answer the question. Within 30 minutes San Jose State University's Jeffrey Rogers Hummel pointed me to this article, which is his solid explanation of the expanding cumulative differential..
The charts shows that the amount of money the government is borrowing is increasing faster than the deficit. This suggests the possibility of some type of off balance sheet goings on that are requiring Treasury borrowing. I had very little clue as to what might be causing it.
Richard Ebeling Dares to Call Bernanke Just a Pin-Head Academic
Over at Think Markets, Richard Ebeling reponds to a Mario Rizzo post with the following comment:
Somewhere in his book on “The Study of Sociology,” Herbert Spencer ridicules the notion that words on a piece of paper upon which there is affixed an official government stamp suddenly gives that piece of paper a special status of reverential homage.Rizzo's response to Ebeling is also noteworthy:
The same seems to apply to official positions in the political regime. At Princeton, Bernanke was just another pin-head academic studying the minutia of Federal Reserve policy in the 1930s.
Elevate him to position of regal importance — and what higher position than the lead monetary central planner of the United States — and every word he speaks become divine utterances from one of the gods on Mt. Olympus.
“Pietro P” is no doubt correct that the shear importance of his decisions results in others having to pay attention to what he says and does.
But, nonetheless, there is an attitude of superior wisdom and understanding that seemingly gets bestowed from holding that majestic position in Washington, D.C., far beyond those of mortal men.
Mario’s comment, of course, is the equivalent of the boy who pointed to the emperor and said, “Look, he has no clothes.”
Most, alas, appear to to mesmerized in believing in what does not exist...
Richard,
I think you are right. I think people NEED to believe that someone can make it all better. But perhaps it is not so much the “man-on-the-street” who thinks this but the politicians, many economists, and especially journalists.
I think this is more of an issue for social psychology (or pathology) than anything else.
Fear Index on Track for Biggest August Gain in Over a Decade
A widely quoted fear index is set for its largest percentage August rise in more than 10 years as equity markets slump on fears the economy is slipping back into recession.
The CBOE Market Volatility Index is up 15.8% for the month through Monday's close, according to FactSet Research, reports MarketWatch.
Another confirmation of low interest rates as a flight to safety.
The CBOE Market Volatility Index is up 15.8% for the month through Monday's close, according to FactSet Research, reports MarketWatch.
Another confirmation of low interest rates as a flight to safety.
Unintended Consequence: I Have to Think that This Is Going to Result in Less Hiring of Low Paid Workers
FT reports:
This will hurt minimum wage workers and support the hiring of high paid fat cat cronies.
A perfect example of the problems with attempting to micro-manage the economy.
US companies face a “logistical nightmare” from a new rule forcing them to disclose the ratio between their chief executive’s pay package and that of the typical employee, lawyers have warned.If I'm the CEO of a publicly traded company, I'm going to do everything I can to move away from businesses that require a lot of low paid workers, to keep my pay ratio comparison low.
The mandatory disclosure will provide ammunition for activists seeking to target perceived examples of excessive pay and perks. The law taps into public anger at the increasing disparity between the faltering incomes of middle America and the largely recession-proof multimillion-dollar remuneration of the typical corporate chief.
Business sees the disclosure provision – buried in section 953(b) of the Dodd-Frank financial reform act – as a bureaucratic headache that may encourage false comparisons.
This will hurt minimum wage workers and support the hiring of high paid fat cat cronies.
A perfect example of the problems with attempting to micro-manage the economy.
The Jakson Hole Papers are Out
Papers delivered at the Jackson Hole Federal Reserve conference are out.
FT has links to the papers and excerpts from their abstracts and conclusions, here.
FT has links to the papers and excerpts from their abstracts and conclusions, here.
Nut Job Activists Want Blankfein Replaced
Yesterday, I posted on the WSJ analysis of how new SEC rules will make it easier for radical activists to harass corporate America and politicize the leadership of corporate America.
Now, Crain's New York reports that Goldman Sachs is the number one target of activists:
What's scary about these activists is that while Goldman continues to play footsie with government for its own advantage, the activists aren't interested in stopping this dirty dealing. They just want to re-direct the cash flow in their direction. Goldman is a tough firm to defend, but if activists somehow gain a foothold or influence at Goldman, they will apply their model in a more aggressive fashion across corporate America.
Now, Crain's New York reports that Goldman Sachs is the number one target of activists:
Goldman Sachs is target No. 1 for activist investors looking to shake up corporate boards now that the Securities and Exchange Commission has made it easier for shareholders to nominate directors.There's no chance that activists are going to put a person on the Goldman board, but the harassment will intensify.
Corporate governance activists are looking to replace Goldman directors at the firm's annual meeting next spring unless the board strips Chief Executive Lloyd Blankfein of his position as chairman.
A campaign against the Goldman board “is definitely something worth looking at,” says Julie Tanner, assistant director for socially responsible investing at Christian Brothers Investment Services in New York, who last spring introduced a shareholder resolution at Goldman's annual meeting to oust Mr. Blankfein as chairman. “We could nominate our own candidates to the board because we question, as do other investors, why the current board leadership has taken no action in light of what's happened at Goldman recently.”...
A senior official at a union pension fund said last week that Goldman's board is the prime target for investors looking to flex their muscles under the new SEC rule.
In addition, activists are busy identifying companies that have consistently rebuffed their challenges. Contested elections are possible at coal mining company Massey Energy, whose reputation has been damaged by a fatal explosion in a West Virginia mine, and at Pulte Homes, which has seated directors even though a majority of shareholders declined to vote for them.
“Everything's just in the planning stages now,” says Brandon Rees, deputy director at the AFL-CIO's office of investment. “But a lot is going on behind the scenes.”
What's scary about these activists is that while Goldman continues to play footsie with government for its own advantage, the activists aren't interested in stopping this dirty dealing. They just want to re-direct the cash flow in their direction. Goldman is a tough firm to defend, but if activists somehow gain a foothold or influence at Goldman, they will apply their model in a more aggressive fashion across corporate America.
The Crying Game
The Washington Examiner read Meghan McCain's new book, Dirty Sexy Politics, so we don't have to:
Meghan McCain writes about her life as a "political prop" in her new book "Dirty Sexy Politics," and she writes about what happens when political props go rogue.
McCain got sacked temporarily from her daddy's 2008 campaign when her blog McCainBlogette.com had become too controversial, and her eagerness to give tours of the Straight Talk Express had worn out the staff.
"I'm not going to lie and say that I wasn't incredibly hurt when the campaign fired me," she wrote. "Was it a promotion or a demotion? Was I fired -- or just excused?" She was then banished to the heartland, on her own bus, to campaign away from her family.
She also writes about the rigors and stresses of the campaign trail and about crying -- a lot. She cried when her mom and dad wouldn't tell her who John McCain's running mate was. She cried when John McCain lost. She also cried during less important moments. The first day she posted to her blog McCainBlogette she freaked out when she saw D.C. gossip blog Wonkette's reaction. The Wonkette blogger, after seeing a picture of Cindy McCain on crutches, wrote this comment: "She probably hurt herself breaking into a pharmacy."
Cue more Meghan McCain crying...
When she got pulled over the day after the election, she told the officer, straight up, that her father had just lost the presidential election.
"This is possibly the best excuse I've ever had for speeding," she said. She got a warning.
The Expected Future Deterioration in Ireland
Writes Roubini Global Economics' Jennifer Kapila:
The Emerald Isle is sinking under the weight of consistently bad news as escalating costs of Anglo Irish’s bad loans precipitated the European Commission's third emergency capital authorization. The next hurdle is September‘s immense refinancing schedule of roughly €26 billion for the largest three banks and Irish Nationwide. Clearly, the Irish condition is no longer just a bad situation in stasis but is deteriorating and should call into question the current forecasts of capital requirements of other eurozone banks.Also from RGE:
Data suggest that U.S. growth in H2 2010 will disappoint further than even our originally bearish projections suggested. As a result, our Macro team revised their numbers downward, resulting in a lower-than-expected S&P forecast.
Zhou Xiachuan Sightings
Amid heavy speculation that China's central banker, Zhou Xiachuan, has "defected" to the U.S. following a trillion in central bank losses, Bloomberg is reporting that Japan's Financial Services Minister, Shozaburo Jimi, met with Zhou yesterday. Toshiharu Mashita, public relations director at Japan’s Financial Services Agency confirmed that its Jimi met with Chinese central bank governor Zhou Xiaochuan in Beijing yesterday.
The People’s Bank of China posted a photograph of Zhou meeting Jimi on its website yesterday. Another picture of the Zhou meeting former Italian Finance Minister Tommaso Padoa Schioppa was also posted on the website.
Paola Paderni, a spokeswoman for the Italian Embassy in Beijing, said she couldn’t confirm the meeting as it wasn’t arranged through the embassy, according to Bloomberg
Two unidentified U.S. government officials said Zhou was not in U.S. custody, according to WaPo.
Stratfor, the original source of the rumors in the U.S. said in a posting today that Zhou hadn’t left China for the U.S., without identifying the source of its information.
Thus many elements of the rumor appear inaccurate, however, the legs that this rumor has and the coverage given to it by among others, WaPo and Bloomberg, hints at the very delicate global nervousness. In a strong economy, no one would pay attention to this type rumor. Such fragility has a lot to do with the very low U.S. interest rates. People are nervous and want their funds close to them in Treasury securities and the like, not in speculative vehicles. That Treasury securities aren't a very stable investment given the debt overhang suggests that this economy could blow at any time.
The People’s Bank of China posted a photograph of Zhou meeting Jimi on its website yesterday. Another picture of the Zhou meeting former Italian Finance Minister Tommaso Padoa Schioppa was also posted on the website.
Paola Paderni, a spokeswoman for the Italian Embassy in Beijing, said she couldn’t confirm the meeting as it wasn’t arranged through the embassy, according to Bloomberg
Two unidentified U.S. government officials said Zhou was not in U.S. custody, according to WaPo.
Stratfor, the original source of the rumors in the U.S. said in a posting today that Zhou hadn’t left China for the U.S., without identifying the source of its information.
Thus many elements of the rumor appear inaccurate, however, the legs that this rumor has and the coverage given to it by among others, WaPo and Bloomberg, hints at the very delicate global nervousness. In a strong economy, no one would pay attention to this type rumor. Such fragility has a lot to do with the very low U.S. interest rates. People are nervous and want their funds close to them in Treasury securities and the like, not in speculative vehicles. That Treasury securities aren't a very stable investment given the debt overhang suggests that this economy could blow at any time.
Show Me the Gold: Ron Paul Makes MSM News
This morning CNN reported on Ron Paul's plan to introduce legislation calling for an audit of the gold in Fort Knox.
During the entire report, which included clips of Paul and also gold bars, the on screen caption read: Show Me the Gold.
Very cool.
During the entire report, which included clips of Paul and also gold bars, the on screen caption read: Show Me the Gold.
Very cool.
Peter Boettke
Whoa! If this were the New York Post, I'd be running a Peter Boettke picture on the front page for the second day in a row.
I received emails from all sides and very heavy traffic to yesterday's post on Boettke. Who would think that an intra-school academic battle would generate such interest?
Yesterday, I couldn't even get away from the story at lunch. I had lunch with a top Congressional researcher and the first thing he brought up was that post.
For the record, I received emails from many former and present Boettke students who assured me that Boettke does use the texts of Mises and Rothbard in his classes.
Boettke, himself, emailed me, questioning some of the points I made in my post. I asked permission to publish his email, but he declined stating that he did not want to start a flame war.
Kelly Evans, the reporter who profiled Boettke, emailed and said:
Thomas DiLorenzo also weighed in with a post, Lying About LewRockwell.com and the Mises Institute, following a comment made at my original post by Brian Bedient.
Finally, several people emailed this earlier Joe Salerno piece centering on Boettke.
I received emails from all sides and very heavy traffic to yesterday's post on Boettke. Who would think that an intra-school academic battle would generate such interest?
Yesterday, I couldn't even get away from the story at lunch. I had lunch with a top Congressional researcher and the first thing he brought up was that post.
For the record, I received emails from many former and present Boettke students who assured me that Boettke does use the texts of Mises and Rothbard in his classes.
Boettke, himself, emailed me, questioning some of the points I made in my post. I asked permission to publish his email, but he declined stating that he did not want to start a flame war.
Kelly Evans, the reporter who profiled Boettke, emailed and said:
By the way, your post on the piece is spot-on – there is much, much more I could/should have added but in Pete’s defense I’ll just mention this: one of his favorite quips to students is that they should “love Mises to pieces”David Kramer weighed in with this piece. Most important in Kramer's comment is that he points out that in the WSJ interview Boettke states:
“The Fed, he [Boettke] says, should be to make money “as neutral as possible, like the rule of law, which never favors one party over the other.”I'm not sure what Pete was thinking here. I would think that almost any Austrian would argue that money is never "neutral". Indeed, the entire basis for the Austrian Business Cycle Theory is that money is not neutral and that central bank interference distorts the structure of the economy. The best interpretation of this for Pete is that he did not choose his words carefully, especially for a professor of economics. The less charitable interpretation is, well, not a charitable view at all.
Thomas DiLorenzo also weighed in with a post, Lying About LewRockwell.com and the Mises Institute, following a comment made at my original post by Brian Bedient.
Finally, several people emailed this earlier Joe Salerno piece centering on Boettke.
Monday, August 30, 2010
Geithner Promotes Charitable Giving to Muslims (Those we aren't bombing)
On Tuesday evening, Treasury Secretary Geithner will host the Treasury Department’s seventh annual Iftaar dinner, where he will "continue the Department’s dialogue with the Muslim-American community on the importance of facilitating safe, secure, and transparent charitable giving and underscore Treasury’s economic engagement with countries in the Middle East."
Also, on Tuesday afternoon, Deputy Secretary Wolin will attend a roundtable discussion hosted by the Federal Deposit Insurance Corporation (FDIC) that will focus on the implementation of new resolution authority for the largest financial firms under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Participants will include government officials, industry executives, academics, and investors.
Also, on Tuesday afternoon, Deputy Secretary Wolin will attend a roundtable discussion hosted by the Federal Deposit Insurance Corporation (FDIC) that will focus on the implementation of new resolution authority for the largest financial firms under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Participants will include government officials, industry executives, academics, and investors.
What's Really Going on at the SEC?
Victims of the Bernie Madoff scam will sure tell you the SEC isn't about protecting the small investor. So what are they up to? WSJ fills us in:
The Reaganites who came to Washington in 1981 used to say that "personnel is policy." Flash forward to 2009 at the Securities and Exchange Commission, where Chairman Mary Schapiro handed senior roles to former union pension fund officials and last week rewarded such funds with more influence over corporate America.
With another of her patented 3-2 party-line votes, Ms. Schapiro has given the big pension funds a power they have never had—the ability to force their preferred candidates for board directors on the proxy ballots that public companies must send to shareholders.
Shareholders who have owned 3% of a company for at least three years will now be able to nominate candidates who would represent up to 25% of a company's board. Until now, pension funds and other dissident shareholders had to pay to mount their own campaigns and mail their own notices to shareholders. But the pension funds rarely did so because they would have had to justify spending their beneficiaries' assets with evidence that their activism was actually increasing the value of the investment. Not likely.
Sold in the name of "shareholder democracy," this new rule will mainly be used not by mom and pop investors, but by union funds and other politically motivated organizations seeking to force mom and pop to support causes they otherwise would not....
Chairman Schapiro's new proxy rule is a weapon to extract political concessions unknowingly underwritten by shareholders. Activist groups and union-led pension funds will come knocking on a corporation's door threatening to run opposition candidates if, for example, the firm doesn't endorse ObamaCare, or won't stop supporting the U.S. Chamber of Commerce.
In order to avoid a proxy fight and get back to business, most CEOs and boards will in practice write checks or bow to this or that political demand, and these negotiations will not be disclosed to shareholders. Smaller public companies have three years until they are hit by the new rule, but the largest companies will face the activists right away.
Ms. Schapiro has signaled from the start of her tenure that her two main constituencies are Congress and unions, not shareholders. She quickly appointed Kayla Gillan, a former general counsel of Calpers, the pension fund for California state workers, as senior adviser. Then Ms. Schapiro brought in Richard Ferlauto—the former pension director at AFSCME, the union representing state and local government employees nationwide—to develop policy in the SEC's investor advocacy office. AFSCME is the largest political campaign contributor in the current election cycle among public sector unions, with 99% of its money going to Democrats.
Former SEC general counsel Brian Cartwright, now at Latham & Watkins, notes that the new SEC rule is right out of the famous playbook of community activists, Saul Alinsky's "Rules for Radicals." He quotes Alinksy reflecting that until a campaign against Eastman Kodak in the 1960s, '[n]o one had ever organized a campaign to use proxies for social and political purposes.'"
Mr. Cartwright adds that, "Alinsky was so excited by his new idea that he trumpeted the proxy tactic as 'one of the single most important breakthroughs in the revolutions of our times.'" Coming from a different point of view, the late, great Peter Drucker once warned in a famous essay about "Pension-Fund Socialism."
Says Mr. Cartwright, "At a moment when our economy is tottering, millions are unemployed with little hope of relief, and American economic dominance is challenged by aggressive new competitors in Asia, a bare party-line majority of the SEC has embarked on a grand experiment in politicizing the leadership of our businesses."
Is There Any Gold in Fort Knox?
Congressman Ron Paul wants to find out. He plans to introduce legislation next year to force an audit of U.S. holdings of gold.
"If there was no question about the gold being there, you think they would be anxious to prove gold is there,” he said in an interview with Kitco.
“Our Federal Reserve admits to nothing, and they should prove all the gold is there. There is a reason to be suspicious and even if you are not suspicious why wouldn’t you have an audit?
“I think it is a possibility," Paul said when asked if there was truth to rumors that there was actually no gold at Ft. Knox or the New York Fed
"If there was no question about the gold being there, you think they would be anxious to prove gold is there,” he said in an interview with Kitco.
“Our Federal Reserve admits to nothing, and they should prove all the gold is there. There is a reason to be suspicious and even if you are not suspicious why wouldn’t you have an audit?
“I think it is a possibility," Paul said when asked if there was truth to rumors that there was actually no gold at Ft. Knox or the New York Fed
Report from China on Zhou Xiaochuan
The Ming Pao report out of China states that trading losses by Zhou, the Governor of the People's Bank of China (China's central bank.) were on investments in Fannie and Freddie.
A translation (with commentary) provided to ZH reads:
China can, of course, can print itself out of any losses, but this would add to their current inflation problems.
Bottom line: I a very fragile global economy, we have a possible new tremor out of China, the full ramifications are as yet unknown.
A translation (with commentary) provided to ZH reads:
It says that "China may punish Zhou because China lost $430 billion foreign exchange on its Fannie and Freddie bond investment". It doesn't say anything about U.S. Treasury Bonds. The truth is that many Chinese thought China lost all its investment in Fannie and Freddie after they were delisted from NYSE. It is also wrong because China doesn't invest with their stocks."We are sure to get further details in upcoming days as to what if anything is really going on. The markets are not waiting,though, China's 1 Month Repo is up by nearly 50%.
China can, of course, can print itself out of any losses, but this would add to their current inflation problems.
Bottom line: I a very fragile global economy, we have a possible new tremor out of China, the full ramifications are as yet unknown.
More on Zhou Xiaochuan and Rumors of a Half Trillion in Losses
From Stratfor via ZH:
Summary
STRATFOR is continuing to examine unconfirmed rumors that Zhou Xiaochuan, governor of the People's Bank of China, fled China to the United States. The origin of the report has been hard to track, especially due to censorship of websites discussing the rumors, so the unconfirmed rumors remain just that -- unconfirmed. However, if true, these rumors could have significant implications for China and for Sino-U.S. relations.
Analysis
STRATFOR is continuing to investigate unconfirmed rumors circulating in Chinese media to the effect that Zhou Xiaochuan, governor of the People's Bank of China, has fled China to the United States. At present there is still no confirmation.
The provenance of the rumor has proved hard to track. A report attributed to Hong Kong's Ming Pao newspaper on Aug. 28 said that Zhou might be punished for a large loss on U.S Treasury bonds worth $430 billion, and that the Chinese government might also punish others in the People's Bank of China. The report allegedly originated on an unknown but "major" Chinese discussion forum, and that forum suggested that Zhou had left the country. Ming Pao denied it had published the report Aug. 30, saying others had used Ming Pao's name without permission to distribute the rumor. STRATFOR has not yet been able to track down the original report, most likely because the Chinese government appears to be actively censoring websites discussing the rumors, deleting some web pages and blocking search engine results that involve Zhou's name and words relating to a possible defection. Rumors have continued to circulate on Chinese blogs and web forums, in particular suggesting that Zhou may have defected to the United States. The reports are still posted on the blog of a professor, Liu Bingfu, whose career experience suggests he is a notable, if minor, academic.
Zhou cannot be confirmed to have appeared in public since the rumors began. The official website of the People's Bank of China has reported on Zhou's activities Aug. 30 -- such as attending meetings with officials from Japan and Italy -- in what appears to be unusual coverage, including photos, and may be an attempt to counteract the rumors. The pictures were taken from a distance but do appear to show Zhou, though it cannot be confirmed whether the photos were in fact taken on Aug. 30. Zhou's last televised appearance was on Aug. 26 on CCTV, attending a conference with Chinese Premier Wen Jiabao, and images of the TV appearance also seem to show Zhou. Zhou had attended official events Aug. 10, in which he called for China to continue developing its western regions, and Aug. 3, when he met with his South Korean and Japanese counterparts.
Therefore what STRATFOR has at the moment remains unconfirmed rumors. If the reports are false, it would seem likely that Zhou will make a public appearance soon to dispel them. Otherwise speculation will continue. There are constantly rumors that high-level Chinese officials are in danger of a downfall, especially dealing with economic policymakers amid the economic challenges in recent years -- this year alone, such rumors have touched Wen and top banking regulator Liu Mingkang. Similarly, China has undertaken an extensive drive over the past year targeting corrupt officials, and a variant of the rumors about Zhou suggests he has disappeared from the public spotlight because he is under investigation for corruption.
What makes the rumors about Zhou more interesting, beyond his position as governor of the central bank, is the specific claim that he has defected to the United States. If true, this would have serious ramifications for domestic and foreign perceptions of China's political and financial stability, as well as for U.S.-Chinese relations. Though the rumors may prove false, their emergence alone likely suggests an attempt to detract from Zhou's reputation. This could be related to his economic policies -- while the rumor of a loss of $430 billion related to U.S. Treasury bills is difficult to comprehend without more context, China has recently adjusted its foreign exchange reserve management, or Zhou may have been targeted as part of the factional struggles ahead of leadership transition in 2012. However, it is relatively rare in China for political leaders to be punished for failed policies, and more likely the consequence of scandals, misconduct or political purges.
Did China Blow Itself Up in the Biggest Short Squeeze in the History of Government Debt?
Could the Chinese have possibly been secretly shorting the U.S. Treasury market?
Rumors are coming out of China that is the case. From Zero Hedge:
Rumors are coming out of China that is the case. From Zero Hedge:
Today's stunning if true news comes from Stratfor which has just issued a blast notifying of circulating rumors "in China that People’s Bank of China (PBC) Gov. Zhou Xiaochuan may have left the country." If proven true, this will be the proverbial first rat bailing on the sinking ship. It gets scarier vis-a-vis prospects of US bonds: "The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within the PBC, including Zhou." Um, $430 Billion in losses? Hopefully this explains why next month's TIC report won't show any incremental increase in Chinese holdings of Treasuries (and most likely quite the opposite). Stratfor continues: "Although Ming Pao on Aug. 30 published a report on its website indicating that the prior report was fabricated by a mainland news site that had attributed the false information to Ming Pao, rumors of Zhou’s defection have spread around China intensively, and Zhou’s name has been blocked from Internet search engines in China." Even if Zhou is safe and sound in Beijing, the fact that China has experienced nearly half a trillion in losses on its UST holdings is shocking, and means that the US Treasury bubble may be approaching the popping phase.Hans Palmstierna emails with the questions about what all this means, if the rumors are true:
From Stratfor:
STRATFOR has received no confirmation of the rumor, and reports by state-run Chinese media appeared to send strong indications that Zhou is in no trouble at the moment. However, the release of this rumor and its dispersion throughout the public is significant, particularly as the Communist Party of China (CPC) is preparing for a leadership transition in 2012.
Chinese state-run media and official government websites have run several high-profile reports about Zhou, which should be seen as a move to refute the rumors. The PBC website published two articles on its homepage reporting on Zhou’s meeting with visiting Japanese Financial Services Minister Shozaburo Jimi during the third China-Japan high-level economic dialogue as well as a meeting with an Italian delegation. Xinhua news agency reported that Zhou told the PBC Party Committee Enlargement Meeting on Aug. 30 it should “continue to implement justice, and strengthen legislative work in the financial system.” Prior to this news, Zhou appeared at the 2nd annual conference of the heads of the Chinese, Japanese and Korean central banks held on Aug. 3, and his most recent public appearance was Aug. 10 for China’s Financial System Anti-corruption Construction Exhibition.
Zhou is known to have lofty political ambitions and is believed to be a close ally to former Chinese President Jiang Zemin, as well as a core figure for Jiang’s “Shanghai Gang.” There has been no shortage of rumors about Zhou’s possible dismissal in the past five years, as he is believed to be associated with several high-level financial scandals. For example, Zhou was rumored to be under “shuanggui,” a form of house arrest administered by the CPC, during the massive crackdown of Shanghai Party Secretary Chen Liangyu in 2006, which was perceived in the country as a crackdown of the Shanghai Gang and part of Hu’s effort to consolidate power ahead of the 2007 power transition. There was also a rumor that he might have been detained following the investigation and arrest of Wang Yi, the vice governor of the China Development Bank, along with several other officials in the financial circle. Currently, several financial scandals are still under investigation, and it is likely that Zhou, as PBC governor and one of the most powerful economic players in the country, could be associated with some cases. Therefore, whether or not the rumor is true at this time, the leaking of this news is very likely to be associated with a power struggle within the Communist Party’s economic hierarchy.
If, according to the rumour, China lost many hundred billions on Treasury debt, does that mean that they have hedged their holdings to an extent previously unknown to man, and the whole thing has blown up in their face? Everyone else has been making money on their bonds recently, have they not?It has to be emphasised that this is all in the rumor stage, but it sure would explain recent Treasury securities strength. If there was a blow up of this size, more details are likely to emerge. A half trillion dollar loss is not something you can keep secret, even in China.
Is there a way that they can have made a derivatives trade and that the unwinding of this short position is what has caused the mad bond rally?
The biggest short squeeze in the history of government debt?
Kelly Evans, Again
Last week I told you to keep an eye on WSJ journalist Kelly Evans, after her focus on money supply. This weekend WSJ published her story on Austrian School economist, Peter Boettke. Evans is clearly a truth seeker. You are going to find few mainstream journalists that are willing, and have the courage, to step outside the very clearly marked borders of what is to be written about in the establishment world. WSJ may have a real reporter on its hands. So kudos to Evans!
Her profile of Pete is right on. It catches the essence of the man. As one guy told me, Pete "is a very hard worker, which singles him out in academia!"
That said, the one point in Evans piece that might raise some eyebrows is the reference to Pete and his "emerging as the intellectual standard-bearer for the Austrian school of economics..."
It would probably be best to describe Pete as the standard-bearer of the Uptight Wing of the Austrian School of Economics. The Uptights tend to promote the work of Noble Prize winning economist Friedrich Hayek, over the work of the Austrian economists Ludwig von Mises and Murray Rothbard.
Disscussing Hayek but ignoring Mises is something akin to discussing Scottie Pippen when talking about the championship years of the Chicago Bulls and not mentioning Michael Jordan. Nothing wrong with Pippen, but Jordan was "The Man."
In economics, there's nothing wrong with promoting the work of Hayek, in general he was a great economist. But "The Man" is Ludwig von Mises. The Uptights tend to push Mises down the memory hole because according to them he was "too stubborn." Translation: He was a man of principle in the face of severe establishment pressure to bend.
Notice there is no mention of Mises in the profile on Boettke.
There also seems to be a new move by the Uptights to distance themselves from the term "Austrian School." Boettke appears to be a key leader in this movement. For example, Boettke wrote:
The strippers are even reading Hayek's much more scholarly The Fatal Conceit.There has been no posting on Pete's blog as to how the Uptights should deal with these latest developments around Hayek.
Her profile of Pete is right on. It catches the essence of the man. As one guy told me, Pete "is a very hard worker, which singles him out in academia!"
That said, the one point in Evans piece that might raise some eyebrows is the reference to Pete and his "emerging as the intellectual standard-bearer for the Austrian school of economics..."
It would probably be best to describe Pete as the standard-bearer of the Uptight Wing of the Austrian School of Economics. The Uptights tend to promote the work of Noble Prize winning economist Friedrich Hayek, over the work of the Austrian economists Ludwig von Mises and Murray Rothbard.
Disscussing Hayek but ignoring Mises is something akin to discussing Scottie Pippen when talking about the championship years of the Chicago Bulls and not mentioning Michael Jordan. Nothing wrong with Pippen, but Jordan was "The Man."
In economics, there's nothing wrong with promoting the work of Hayek, in general he was a great economist. But "The Man" is Ludwig von Mises. The Uptights tend to push Mises down the memory hole because according to them he was "too stubborn." Translation: He was a man of principle in the face of severe establishment pressure to bend.
Notice there is no mention of Mises in the profile on Boettke.
There also seems to be a new move by the Uptights to distance themselves from the term "Austrian School." Boettke appears to be a key leader in this movement. For example, Boettke wrote:
As of January 1, 2010, we are changing our name to "Coordination Problem". This name change is symbolic as well as substantive. The term "Austrian economics" has become as much a hindrance to the advancement of thought as a convenient shorthand to signal certain methodological and analytical presumptions. We started this blog with a clear purpose to emphasize ongoing research in the scientific literature, and developments in higher education as related to economics and political economy. As a group we are committed to methodological individualism, market process theory, institutional analysis, and spontaneous order theorizing. And while we do not shy away from policy discussions, we do not identify with any political party or specific political movement.Thus, it is somewhat ironic that a member of the Uptights has been identified as the standard-bearer of Austrian economics. Evans even seems to be a bit confused about all this since she writes in the profile:
As an experiment, over the past six months we have been tracking the use of the term Austrian economics in the news and in the blogosphere. Less systematically, we have also been listening carefully to the use of the term among fellow professional economists and what they think the label means. The results do not fit our intention. Google alert, for example, inevitably points to financial advice or libertarian politics, rarely to the research paradigm of F. A. Hayek, never to the scholarship of Israel Kirzner. Mises is often mentioned, but Mises the ideological symbol, not Mises the analytical economist. The "Austrian" theory of the business cycle is mentioned, but only in relationship to anti-fed politics and hard money advocacy, and never as an ongoing research program among professional economists.
These trends are not recent, but have been constant throughout our respective careers. We have always been among those who attempted to offer resistance to this use of the term. It has become evident to us that our efforts have been futile. Rather than resist the pure ideological identification, we are choosing to devote our efforts elsewhere. The name Austrian economics has been lost as a focal point for a tradition of economic scholarship, and is now a focal point for something else. We have to let it go.
The resurgence of Austrian economics does have its hazards, Mr. Boettke says. The antigovernment fervor on cable-television shows and the Internet may have popularized its theories, but it also "reinforces the idea to critics that these are crackpot ideas," he said. He has tried to distance himself from conspiracy theorists and even dropped "Austrian" from the name of his blog. But he hasn't yet thought of a better term.Talk about cable-television fervor. A mention of Hayek's book, The Road to Serfdom, by the curious, one step in the insane asylum, Glenn Beck, has sent the book to the top of best seller lists. And an even deeper reading of Hayek is being done by strippers.
The strippers are even reading Hayek's much more scholarly The Fatal Conceit.There has been no posting on Pete's blog as to how the Uptights should deal with these latest developments around Hayek.
In addition to the Uptights tendency to attempt to keep Mises and Rothbard stuffed down the memory hole. Many of the Uptights have wandered off the reservation with regard to Austrian methodology. The discussion on methodology is beyond the scope of this post, so I direct you to the paper by David Gordon on the subject. Gordon should be considered a kung fu master of the "Hard Core" Wing of the Austrian School. He has no fear. He will walk down dark allies, speak amongst gold bugs, make paths through Glenn Beck rallies and school curious strippers, and at all times, speak of the wisdom of not only Hayek, but Mises and Rothbard, as well.
In any case, congratulations to Pete. He is a good guy. I'm not sure what texts he uses in his courses, but I hope his students are secretly holding discussion groups around such books as Ludwig von Mises' Human Action and Murray Rothbard's Man, Economy and State. And that they occasionally cruise, Mises.org.
Robert Wenzel
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Robert Wenzel
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Data Point: Yen Surge
The surge in the yen continues, anyone still in a carry trade position, short the yen, is getting killed.
Speculation continues that the BoJ will intervene directly in the currency markets. The prime minister and Ministry of Finance officials have both been jawboning intervention, but BOJ remains on the sidelines.
The yen is now at a more than a 15 year high against the dollar. Expect a flood of Japanese tourists in America. Further, and much more important, given the instability in global markets, such a huge swing in the yen could result in shifts in vulnerable markets in unkown ways. Stay alert.
Speculation continues that the BoJ will intervene directly in the currency markets. The prime minister and Ministry of Finance officials have both been jawboning intervention, but BOJ remains on the sidelines.
The yen is now at a more than a 15 year high against the dollar. Expect a flood of Japanese tourists in America. Further, and much more important, given the instability in global markets, such a huge swing in the yen could result in shifts in vulnerable markets in unkown ways. Stay alert.
Geithner's Monday: Boring
On Monday afternoon, Secretary Geithner will attend the President's Economic Daily Briefing at the White House.
Sunday, August 29, 2010
Understanding the Pension Tsunami about to Hit California
"Few Californians in the private sector have $1 million in savings, but that's effectively the retirement account they guarantee to public employees who opt to retire at age 55 and are entitled to a monthly, inflation-protected check of $3,000 for the rest of their lives." -Arnold Schwarzenegger via WSJ
(htMarkPerry)
(htMarkPerry)
China to World We Luv Our Rare Earth
In a heavy bit of national planning, China has announced that it is cutting back 72% of its exports of rare earth metals. For cover they are using environmental concerns.
Clearly, Chinese leadership is having trouble understanding free trade, the law of association and the dangers of overall macro-economic management.
Clearly, Chinese leadership is having trouble understanding free trade, the law of association and the dangers of overall macro-economic management.
Bernanke Said What?
Dean Baker is picking up on the scent that Bernanke is a mad scientist. He writes:
In his speech at the annual meeting of central bankers in Jackson Hole, Wyoming, Federal Reserve Board Chairman Ben Bernanke listed his options to counter a faltering economy. One of the three items on the list was reducing the 0.25 percent interest rate that the Federal Reserve Board now pays on reserves.
It is striking that Bernanke would include this item on his list because he just instituted the policy of paying interest on reserves last year. At the time there was no discussion of the possibility that paying interest on reserves would have any significant negative impact on growth.
Axa Reduces Stake in Goldman Sachs
Goldman Sach's former largest shareholder isn't buying the hype coing out of the GS PR machine that everything is fine at the firm.
Axa, whuch was Goldman Sachs largest shareholder, has cut its stake in Goldman Sachs by more than half in the last quarter.
Axa, the French insurance and money management firm, reduced its holdings in Goldman by more than 16m shares in the three-month period ending June 30, according to a recent SEC filing. The reduction leaves Axa’s holdings at 2.1 per cent from 5 per cent.
Axa, whuch was Goldman Sachs largest shareholder, has cut its stake in Goldman Sachs by more than half in the last quarter.
Axa, the French insurance and money management firm, reduced its holdings in Goldman by more than 16m shares in the three-month period ending June 30, according to a recent SEC filing. The reduction leaves Axa’s holdings at 2.1 per cent from 5 per cent.
The HyperInflation of Chile: Lessons for Us All
Given the current volatile situation in the United States, it is important to understand how other economies have moved through crisis economic times. I especially pay attention when someone tells me they have lived through a hyperinflation. The more you understand about hyperinflation, the more you will be prepared if hyperinflation should hit. Indeed, it may give you a major edge.
In an important article Gonzalo Lira explains the hyperinflation in Chile that occurred between 1970 and 1973:
The one note of caution I must add is that Lira looks beyond a coming crisis for America and expects things to return to a new better normal, as it did in Chile. This may or may not occur in the United States and may take years or decades if it does return to a new normal.The real point to keep in mind is that things could be very different for the economy, very soon. Learn as much you can about volatile economies, especially those that suffered under hyper inflation, so that you have some kind of edge if such a period hits the U.S.
One other point, during hyperinflations asset prices including stocks tend to go up. The drop in the stocks in Chile during the hyperinflation is likely the result of a great fear the companies were going to be nationalized.
In an important article Gonzalo Lira explains the hyperinflation in Chile that occurred between 1970 and 1973:
Apart from what happened with the Weimar Republic in the 1920’s, advanced Western economies have no experience with hyperinflation. (I actually think that the high inflation that struck the dollar in the 1970’s, and which was successfully choked off by Paul Volcker, was in fact an incipient bout of commodity-driven hyperinflation—but that’s for some other time.) Though there were plenty of hyperinflationary events in the XIX century and before, after the Weimar experience, the advanced economies learned their lesson—and learned it so well, in fact, that it’s been forgotten.Be sure to read the entire Lira piece, here. It is very important and he has great insights into how things may develop in the U.S.
However, my personal history gives me a slight edge in this discussion: During the period 1970–’73, Chile experienced hyperinflation, brought about by the failed and corrupt policies of Salvador Allende and his Popular Unity Government. Though I was too young to experience it first hand, my family and some of my older friends have vivid memories of the Allende period—vivid memories that are actually closer to nightmares.
The causes of Chile’s hyperinflation forty years ago were vastly different from what I believe will cause American hyperinflation now. But a slight detour through this history is useful to our current predicament.
To begin: In 1970, Salvador Allende was elected president by roughly a third of the population. The other two-thirds voted for the centrist Christian Democrat candidate, or for the center-right candidate in roughly equal measure. Allende’s election was a fluke.
He wasn’t a centrist, no matter what the current hagiography might claim: Allende was a hard-core Socialist, who headed a Hard Left coalition called the Unidad Popular—the Popular Unity (UP, pronounced “oo-peh”). This coalition—Socialists, Communists, and assorted Left parties—took over the administration of the country, and quickly implemented several “reforms”, which were designed to “put Chile on the road to Socialism”.
Land was expropriated—often by force—and given to the workers. Companies and mines were also nationalized, and also given to the workers. Of course, the farms, companies and mines which were stripped from their owners weren’t inefficient or ineptly run—on the contrary, Allende and his Unidad Popular thugs stole farms, companies and mines from precisely the “blood-thirsty Capitalists” who best treated their workers, and who were the most fair towards them.
Allende’s government also put UP-loyalists in management positions in those nationalized enterprises—a first step towards implementing a Leninist regime, whereby the UP would have “political control” over the means of production and distribution. From speeches and his actions, it’s clear that Allende wanted to implement a Maoist-Leninist regime, with himself as Supreme Leader.
One of the key policy initiative Allende carried out was wage and price controls. In order to appease and co-opt the workers, Allende’s regime simultaneously froze prices of basic goods and services, and augmented wages by decree.
At first, this measure worked like a charm: Workers had more money, but goods and services still had the same old low prices. So workers were happy with Allende: They went on a shopping spree—and rapidly emptied stores and warehouses of consumer goods and basic products. Allende and the UP Government then claimed it was right-wing, anti-Revolutionary “acaparadores”—hoarders—who were keeping consumer goods from the workers. Right.
Meanwhile, private companies—forced to raise worker wages while maintaining their same price structures—quickly went bankrupt: So then, of course, they were taken over by the Allende government, “in the name of the people”. Key industries were put on the State dole, as it were, and made to continue their operations at a loss, so as to satisfy internal demand. If there was a cash shortfall, the Allende government would simply print more escudos and give them to the now State-controlled companies, which would then pay the workers.
This is how hyperinflation started in Chile. Workers had plenty of cash in hand—but it was useless, because there were no goods to buy.
So Allende’s government quickly instituted the Juntas de Abastecimiento y Control de Precios (“Unions of Supply and Price Controls”, known as JAP). These were locally formed boards, composed of loyal Party members, who decided who in a given neighborhood received consumer products, and who did not. Naturally, other UP-loyalists had preference—these Allende backers received ration cards, with which to buy consumer goods and basic staples.
Of course, those people perceived as “unfriendly” to Allende and the UP Government either received insufficient rations for their families, or no rations at all, if they were vocally opposed to the Allende regime and its policies.
Very quickly, a black market in goods and staples arose. At first, these black markets accepted escudos. But with each passing month, more and more escudos were printed into circulation by the Allende government, until by late ’72, black marketeers were no longer accepting escudos. Their mantra became, “Sólo dólares”: Only dollars.
Hyperinflation had arrived in Chile. ..
But for sensible people, Apocalypse is a distraction—it’s not the main event. For sensible people who want to be prepared, Apocalypse represents opportunities.
A true story: In ’73, at the height of the Allende-created hyperinflation, an uncle of mine, who was then a college student, was offered an apartment in exchange for his car. That’s right—an apartment. He owned a crappy little Fiat 147—a POS if ever there was such a thing—but cars in Chile in the middle of that hyperinflation were so scarce, and considered so valuable, that he was offered an apartment in exchange. To this day, my uncle still tells the story—with deep regret, because he didn’t follow through on the offer: “That Fiat was in the junkyard by ’78, but that apartment still stands! And today it’s worth nearly a half a million dollars!” Actually, I think it’s worth a bit more than that.
Another true story: A banker friend of mine manages the assets of a fabulously wealthy 70-something gentleman, whom I'll call Alfredo. In 1973, Don Alfredo was a youngish man, just starting out, with a degree in engineering but no money—until he inherited US$3,000 from a deceased aunt. Alfredo realized that the $3,000 were in a sense worthless: He couldn’t buy anything with them, and it wasn’t enough for him to leave the country and start over someplace else. After all, even then, $3,000 was not that much money.
So he took those $3,000, went down to the stock exchange, and spent all of it on Chilean blue-chip companies: Mining companies, chemical companies, paper companies, and so on. The stock were selling for nothing—less than penny stock—because of the disastrous policies of the Allende government. His stock broker at the time told him not to buy stocks, as Allende’s government, it was thought, would soon nationalize these companies as well.
Alfredo ignored his broker, and went ahead with the stock purchases: He spent all of his $3,000 on buckets of near-worthless equities.
On September 11, 1973, the commanders in chief of the four branches of the Chilean military staged a coup d’état. Within a year, Alfredo’s stock had rebounded about ten-fold. Since then, they’ve multiplied several thousand-fold—yes: Several thousand-fold. Don Alfredo has lived off of that $3,000 investment ever since—it’s what made him a multi-millionare today.
He realized, of course, that either those blue-chip companies would be nationalized by Allende—in which case he would lose all his $3,000 inheritance, which really wouldn’t change his fortunes very much—or somehow a new normal would arrive in Chile. Since the $3,000 couldn’t buy him anything, he took a gamble—and won
The one note of caution I must add is that Lira looks beyond a coming crisis for America and expects things to return to a new better normal, as it did in Chile. This may or may not occur in the United States and may take years or decades if it does return to a new normal.The real point to keep in mind is that things could be very different for the economy, very soon. Learn as much you can about volatile economies, especially those that suffered under hyper inflation, so that you have some kind of edge if such a period hits the U.S.
One other point, during hyperinflations asset prices including stocks tend to go up. The drop in the stocks in Chile during the hyperinflation is likely the result of a great fear the companies were going to be nationalized.
Top Ten
Below are the Top Ten most viewed EPJ posts for the week ending Saturday August 28, 2010.
#1 Understanding the Fear in the Markets
#2 Why Bernanke Isn't Having a Nervous Breakdown
#3 The Multi-Trillion Dollar Debt and What It Means to Your Standard of Living Right Now
#4 The Case for Ben Bernanke as Mad Scientist
#5 ALERT: Creator of "Hindenburg Omen" Exits Stock Market
#6 Soros Bailing Out of U.S. Stock Market (2nd week on list)
#7 The Full Incredible Dimensions of the Sovereign Debt Crisis: Morgan Stanley Let's It Rip
#8 The Hindenburg Omen: The Real Thing or Hot Air? (2nd week on list)
#9 The ShoreBank Bailout, the Scent of Obama and a Mysterious Player (2nd week on list)
#10 First Indication that the St Louis Fed Knows Bernanke is a Mad Scientist
#1 Understanding the Fear in the Markets
#2 Why Bernanke Isn't Having a Nervous Breakdown
#3 The Multi-Trillion Dollar Debt and What It Means to Your Standard of Living Right Now
#4 The Case for Ben Bernanke as Mad Scientist
#5 ALERT: Creator of "Hindenburg Omen" Exits Stock Market
#6 Soros Bailing Out of U.S. Stock Market (2nd week on list)
#7 The Full Incredible Dimensions of the Sovereign Debt Crisis: Morgan Stanley Let's It Rip
#8 The Hindenburg Omen: The Real Thing or Hot Air? (2nd week on list)
#9 The ShoreBank Bailout, the Scent of Obama and a Mysterious Player (2nd week on list)
#10 First Indication that the St Louis Fed Knows Bernanke is a Mad Scientist
Saturday, August 28, 2010
The Importance of Marc Rich
We have done plenty of reviews and mentions of the Marc Rich biography The Secret Lives of Marc Rich, here and here, but I'm linking here to the John Hempton review of the book because I think it is very important to understand how savvy businessmen operate in a world of heavy regulation.
As I have mentioned, before Rich hightailed it to Switzerland, I knew some of his traders here in the U.S. To a man they told me that Rich has one of the most creative, aggressive and shrewd minds in finance, with a governments be damned attitude. He's one of a kind. People tell me that he kept Henry Kissinger on his payroll, even while he was living in Switzerland as a fugitive.
The one thing you here from all traders that worked with him was that he would consider every angle possible to get a deal done. Big and small, he thought of everything. When he secretly owned 50% of the motion production company, FOX, he let all his traders know that if they needed an early tape of a movie before it was released to the general public, to possibly get a trade over the hump,they could have it.
In a conference room, they said, he was just amazing to watch. No angle to get a trade done was left unconsidered.
As regulations get more complex and more suffocating here in the U.S., it is going to make life much more difficult for most businesses. But for the few that understand how to operate in such an environment, like Rich, they will have the ability to make huge money. Breaking down bureaucratic barriers pays very big.
As I have mentioned, before Rich hightailed it to Switzerland, I knew some of his traders here in the U.S. To a man they told me that Rich has one of the most creative, aggressive and shrewd minds in finance, with a governments be damned attitude. He's one of a kind. People tell me that he kept Henry Kissinger on his payroll, even while he was living in Switzerland as a fugitive.
The one thing you here from all traders that worked with him was that he would consider every angle possible to get a deal done. Big and small, he thought of everything. When he secretly owned 50% of the motion production company, FOX, he let all his traders know that if they needed an early tape of a movie before it was released to the general public, to possibly get a trade over the hump,they could have it.
In a conference room, they said, he was just amazing to watch. No angle to get a trade done was left unconsidered.
As regulations get more complex and more suffocating here in the U.S., it is going to make life much more difficult for most businesses. But for the few that understand how to operate in such an environment, like Rich, they will have the ability to make huge money. Breaking down bureaucratic barriers pays very big.
Learning from The Madoff Victims
A new book is out on the Bernie Madoff scam, The Club No On Wanted To Join. It is a compilation by Alexandra Roth (a Madoff victim) of the words of many who lost because of Madoff.
The victims included many who were retired, and had to seek new ways to generate income at an advanced age. Although the media portrayed the victims as the super wealthy, and there were those, there also were others who scraped up as little as $30,000 and invested with Madoff through feeder funds.
This book is haunting in the sense that most people did some level of due diligence before investing with Madoff, or invested only after being advised to do so by a person they trusted. They felt comfortable in the investment. These were not blind greedy people. They weren't seeking an outrageous gain that made no sense.
In thinking about the victims, it is hard to see what they could have done not to be fooled by Madoff. You would have had to be a very sophisticated investor not to be sucked in by Madoff. On the other hand. how a legitimate audit by the SEC or FINRA could have failed to protect against Madoff shenanigans boggles the mind.
Thus, there is a lesson for us all here. Never put all your eggs in one basket. In fact, I recommend for most that at least 50% of all money be put aside for investment in four separate categories as outlined in the book by Harry Browne, Fail-Safe Investing. After you have half your assets set up the way Browne suggests, then it is fine to try other investments, but even in this half of your portfolio you should have at least four completely different investments.
There's another reason to read The Club No One Wanted To Join, for those interested in studying how people cope with huge changes in financial circumstances. In that sense this book is truly inspiring. The story of Robert Halio and his wife, as well as the story of many others is incredible. He was retired and lost 95% of his money to Madoff. He couldn't get a job in his old career, so has gone to driving people around and building quite a business doing so. There are other stories like this in the book. If things are tough for you because of the Great Recession, pick this book up and find how difficult things can be, and how people pick themselves up after the intial shock.
One also hopes that this book becomes a standard reading in schools that teach those who will become money managers. With this book you get a really hard dose of how Bernie Madoff damaged a lot of peoples lives. Maybe some future money manager after reading this will realize the damage of stepping over the line can cause, and maybe, just maybe, stop himself before its to late.
And finally, this book is a great antidote for those who think government agencies will be there to protect them. These people found out the hard way that the government agencies, the SEC and SIPC, and the quasi-government agency, FINRA, are a joke and do nothing but protect their turf.
As victim Roth put it:
But for the rest of us it is a reminder to be alert, with interest rates as low as they are there are likely to be many mini-Madoff's operating and promising a better return.
The victims included many who were retired, and had to seek new ways to generate income at an advanced age. Although the media portrayed the victims as the super wealthy, and there were those, there also were others who scraped up as little as $30,000 and invested with Madoff through feeder funds.
This book is haunting in the sense that most people did some level of due diligence before investing with Madoff, or invested only after being advised to do so by a person they trusted. They felt comfortable in the investment. These were not blind greedy people. They weren't seeking an outrageous gain that made no sense.
In thinking about the victims, it is hard to see what they could have done not to be fooled by Madoff. You would have had to be a very sophisticated investor not to be sucked in by Madoff. On the other hand. how a legitimate audit by the SEC or FINRA could have failed to protect against Madoff shenanigans boggles the mind.
Thus, there is a lesson for us all here. Never put all your eggs in one basket. In fact, I recommend for most that at least 50% of all money be put aside for investment in four separate categories as outlined in the book by Harry Browne, Fail-Safe Investing. After you have half your assets set up the way Browne suggests, then it is fine to try other investments, but even in this half of your portfolio you should have at least four completely different investments.
There's another reason to read The Club No One Wanted To Join, for those interested in studying how people cope with huge changes in financial circumstances. In that sense this book is truly inspiring. The story of Robert Halio and his wife, as well as the story of many others is incredible. He was retired and lost 95% of his money to Madoff. He couldn't get a job in his old career, so has gone to driving people around and building quite a business doing so. There are other stories like this in the book. If things are tough for you because of the Great Recession, pick this book up and find how difficult things can be, and how people pick themselves up after the intial shock.
One also hopes that this book becomes a standard reading in schools that teach those who will become money managers. With this book you get a really hard dose of how Bernie Madoff damaged a lot of peoples lives. Maybe some future money manager after reading this will realize the damage of stepping over the line can cause, and maybe, just maybe, stop himself before its to late.
And finally, this book is a great antidote for those who think government agencies will be there to protect them. These people found out the hard way that the government agencies, the SEC and SIPC, and the quasi-government agency, FINRA, are a joke and do nothing but protect their turf.
As victim Roth put it:
We have come to the unavoidable conclusion, that there is no one looking out for the small/average investor. Not the SEC, not SIPC, not FINRA, no one. In fact they try to protect themselves from the investors.But most of all this is about haunting financial loss and recovery, Maureen Ebel wrote in part to Madoff that is included in the book:
I was left with what was in my wallet and what was in my checking account.There are few books like this around. And as I said, up and coming money mangers should be the first in line to read this book.
You did not destroy my faith in humanity because I have received so much generosity and kindness from so many. I became poor, and at the same time I became rich in the knowledge of people's goodness.
But for the rest of us it is a reminder to be alert, with interest rates as low as they are there are likely to be many mini-Madoff's operating and promising a better return.
EPJ Exclusive: Gary North, Part 2
You'll never find a scoop like this at NYT.
EPJ has been provided, by a source within LRC, the link to the second part of Gary North's"unofficial translation" of Federal Reserve Chairman Ben Bernanke's Jackson Hole speech. It will not be linked at LRC until Monday. Part 2 is even better than the translation of the first half. It's Gary North at his best, and you can find it here.
EPJ has been provided, by a source within LRC, the link to the second part of Gary North's"unofficial translation" of Federal Reserve Chairman Ben Bernanke's Jackson Hole speech. It will not be linked at LRC until Monday. Part 2 is even better than the translation of the first half. It's Gary North at his best, and you can find it here.
Indications Roubini Doesn't Understand What Bernanke Is Up To
Nouriel Roubini tweets:
The new money will enter the system because the re-investments made by the Fed will to some degree not result in just purchases from banks that can place money as excess reserves with the Fed, but by individuals and other institutions that will result in the money entering the system.
Thus, Roubini doesn't get it. Money will enter the system. How much will depend on what banks do with money that is deposited by those outside the system. But to the degree that first round hits those outside the banking system that will result in an increase in the money supply. As I have pointed out, it isn't clear what the multiplier effect will be, but some will get in the system.
Thus, Roubini is off, in fact way off. The Fed is far from impotent. To the degree it pumps money beyond the inside loop banking system, that money will enter the economy, and the Fed never has to stop such activities. Thus, rather than being impotent the Fed has at its disposal the capability of printing any amount of money and getting it in the system.
Fed policy is impotent & more QE is useless :banks aren't lending 1 trillion of free reserves: why would they lend a second trillion of QE?As I have pointed out before, the Fed's re-investing of MBS cash flow will pump new money into the system (exact quantities depending on several factors).
The new money will enter the system because the re-investments made by the Fed will to some degree not result in just purchases from banks that can place money as excess reserves with the Fed, but by individuals and other institutions that will result in the money entering the system.
Thus, Roubini doesn't get it. Money will enter the system. How much will depend on what banks do with money that is deposited by those outside the system. But to the degree that first round hits those outside the banking system that will result in an increase in the money supply. As I have pointed out, it isn't clear what the multiplier effect will be, but some will get in the system.
Thus, Roubini is off, in fact way off. The Fed is far from impotent. To the degree it pumps money beyond the inside loop banking system, that money will enter the economy, and the Fed never has to stop such activities. Thus, rather than being impotent the Fed has at its disposal the capability of printing any amount of money and getting it in the system.
Chairman Joint Chiefs of Staff: National Debt is a Security Threat
The national debt is the single biggest threat to national security, according to Adm. Mike Mullen, chairman of the Joint Chiefs of Staff. Tax payers will be paying around $600 billion in interest on the national debt by 2012, the chairman told students and local leaders in Detroit, reports ExecutiveGov.com.
“That’s one year’s worth of defense budget,” he said, adding that the Pentagon needs to cut back on spending.
On the one hand it is good that the Chairman of the Joint Chiefs of Staff recognizes that there is a huge national debt problem, but one has to ask: Why is the Chairman of JCOS mentioning this in a speech to students? This is disturbing, despite some his talk of Pentagon cutbacks in spending. I've heard that one before
Clearly, government has recognized that a debt crisis is coming and they are trying to get ahead of it and control the reaction to it. Who really knows what kind of new regulations and taxes they have planned.
Keep in mind that the only real solution to the debt crisis is far less government spending and a bankruptcy which forces the liquidation of the vast amounts of land and buildings owned by the governmentt, which should be used to pay off creditors, including those counting on Social Security..
“That’s one year’s worth of defense budget,” he said, adding that the Pentagon needs to cut back on spending.
On the one hand it is good that the Chairman of the Joint Chiefs of Staff recognizes that there is a huge national debt problem, but one has to ask: Why is the Chairman of JCOS mentioning this in a speech to students? This is disturbing, despite some his talk of Pentagon cutbacks in spending. I've heard that one before
Clearly, government has recognized that a debt crisis is coming and they are trying to get ahead of it and control the reaction to it. Who really knows what kind of new regulations and taxes they have planned.
Keep in mind that the only real solution to the debt crisis is far less government spending and a bankruptcy which forces the liquidation of the vast amounts of land and buildings owned by the governmentt, which should be used to pay off creditors, including those counting on Social Security..
Paul Allen: I Patented Silicon Valley Years Ago
Billionaire Microsoft co-founder Paul Allen is suing Silicon Valley's biggest players, including Apple, Google, eBay, Facebook, for patent-infringement, accusing them of taking technology from his research lab.
Allen did not sue Amazon, which presumably uses some of the same technologies but also rents space from Allen in Seattle. Microsoft, also was not sued.
Particularly puzzling about this lawsuit is that Allen closed his research lab more than a decade ago.
My view on copyright and patents, which I expound upon in an upcoming book, is that the concept of copyright and patent (aside from government's questionable role in the process) is currently faulty in that it bestows all rights to what I call "first creators" versus "independent creators".
For example, under current law of "first creators", the first person to invent the wheel would own exclusive rights of patent protection for the wheel.
Yet, it is entirely possible, indeed very likely, that a separate independent creators of the wheel could emerge, in fact many such independent crerators. There is no moral or ethical reason that these people should not have the same patent protection as first creators. Thus, inventors of the wheel, boiling water, even air conditioning, would have extremely limited patent protection, for all practical purposes none, since the number of likely independent creators would be significant.
On the other hand, more complex creatiotions, say a Shakespeare play, which obviously no one else would would independently create would have full copyright protection.
In a world where "independent creators" are awarded protection versus a monopoly grant to the "first creators", researchers are very likely to record their ongoing development work to prove their independent work.
Obviously, there would still be occasional patent disputes, with cases that wind up in court (a private property society court or otherwise) . In such a court the patent/copyright equivalent of innocent until proven guilty should hold. That is, it should be assumed that a creator of a product (in the broad sense) has done so independently, unless it can be proven otherwise. Thus, it would be extremely difficult for someone who invented the wheel to prove that someone else did not invent the wheel independently. On the other hand, it would be very easy for Shakespeare to prove his writing was his own and that anyone else claiming rights to the writings was in fact stealing.
Curiously, this "independent creatorr" method of protection provides incentive in a way that would tend to increase the standard of living, since creations that obviously can be made relatively easily by more than one person are significantly not as protected as under the concept of first creator., On the other hand, the "independent creator" method of protection provides strong protection for those who are likely to invent something complex that no others arenot likely to invent, such as a Shakespeare play. This strong protection (against theft), almost monopoly like protection, will provide the potential for more lucrative streams of earnings and thus draw out more of these talents.
I suspect the majority of the infringements. that Allen claims, would fall under independent creation status and hold very little weight under an "independent creation" method of patent protection.
Allen did not sue Amazon, which presumably uses some of the same technologies but also rents space from Allen in Seattle. Microsoft, also was not sued.
Particularly puzzling about this lawsuit is that Allen closed his research lab more than a decade ago.
My view on copyright and patents, which I expound upon in an upcoming book, is that the concept of copyright and patent (aside from government's questionable role in the process) is currently faulty in that it bestows all rights to what I call "first creators" versus "independent creators".
For example, under current law of "first creators", the first person to invent the wheel would own exclusive rights of patent protection for the wheel.
Yet, it is entirely possible, indeed very likely, that a separate independent creators of the wheel could emerge, in fact many such independent crerators. There is no moral or ethical reason that these people should not have the same patent protection as first creators. Thus, inventors of the wheel, boiling water, even air conditioning, would have extremely limited patent protection, for all practical purposes none, since the number of likely independent creators would be significant.
On the other hand, more complex creatiotions, say a Shakespeare play, which obviously no one else would would independently create would have full copyright protection.
In a world where "independent creators" are awarded protection versus a monopoly grant to the "first creators", researchers are very likely to record their ongoing development work to prove their independent work.
Obviously, there would still be occasional patent disputes, with cases that wind up in court (a private property society court or otherwise) . In such a court the patent/copyright equivalent of innocent until proven guilty should hold. That is, it should be assumed that a creator of a product (in the broad sense) has done so independently, unless it can be proven otherwise. Thus, it would be extremely difficult for someone who invented the wheel to prove that someone else did not invent the wheel independently. On the other hand, it would be very easy for Shakespeare to prove his writing was his own and that anyone else claiming rights to the writings was in fact stealing.
Curiously, this "independent creatorr" method of protection provides incentive in a way that would tend to increase the standard of living, since creations that obviously can be made relatively easily by more than one person are significantly not as protected as under the concept of first creator., On the other hand, the "independent creator" method of protection provides strong protection for those who are likely to invent something complex that no others arenot likely to invent, such as a Shakespeare play. This strong protection (against theft), almost monopoly like protection, will provide the potential for more lucrative streams of earnings and thus draw out more of these talents.
I suspect the majority of the infringements. that Allen claims, would fall under independent creation status and hold very little weight under an "independent creation" method of patent protection.
Bernanke's Jackson Hole Speech Translated
As every Fed Watcher knows, Federal Reserve chairmen have always prided themselves on being difficult to understand whenever they speak.
Thankfully, Gary North has taken the time to provide an "unofficial translation" of Federal Reserve chairmen Ben Bernanke's recent speech at Jackson Hole, Wyoming. This you do not want to miss. Part 1 of North's translation is here.
(Thanks2LewRockwell)
Thankfully, Gary North has taken the time to provide an "unofficial translation" of Federal Reserve chairmen Ben Bernanke's recent speech at Jackson Hole, Wyoming. This you do not want to miss. Part 1 of North's translation is here.
(Thanks2LewRockwell)
Friday, August 27, 2010
The New FDR Is Obama
Are you wondering why the economy is stumbling so badly?
In addition to the mad money supply management of Fed Chairman Bernanke, there is the suffocating regulatory environment that the Obama Administration is creating. It is reminiscent of the regulatory environment that FDR created. And that ain't good.
Thomas Cooley and Lee O'Hanian write in today's WSJ:
Further, you have the tremendous debt overhang, which is now being absorbed by foreigners and panicked Americans. No one knows how long these buyers will continue to do so.
In other words, this is not your father's Great Depression. Obama is FDR on steroids. And that isn't good for anyone except a few insider elite.
In addition to the mad money supply management of Fed Chairman Bernanke, there is the suffocating regulatory environment that the Obama Administration is creating. It is reminiscent of the regulatory environment that FDR created. And that ain't good.
Thomas Cooley and Lee O'Hanian write in today's WSJ:
In 1937, after several years of partial recovery from the Great Depression, the U.S. economy fell into a sharp recession...The economy did not tank in 1937 because government spending declined. Increases in tax rates, particularly capital income tax rates, and the expansion of unions, were most likely responsible. Unfortunately, these same factors pose a similar threat today...The remarkable thing is that Cooley and O'Hanian are likely optimistic in their view. In addition to FDR style higher taxes on capital income and stronger government promotion of unions, you also have ObamaCare which is going to cause all kinds of unkown swings in the healthcare sector, plus you have the potential of major suffocation of the consumer financial sector, given the new regulatory power that will be assumed by whoever is put in control of the Consumer Finance Protection Board, especially if it is the interventionist pit bull Elizabeth Warren.
...in 1936, the Roosevelt administration pushed through a tax on corporate profits that were not distributed to shareholders. The sliding scale tax began at 7% if a company retained 1% of its net income, and went to 27% if a company retained 70% of net income. This tax significantly raised the cost of investment, as most investment is financed with a corporation's own retained earnings.
The tax rate on dividends also rose to 15.98% in 1932 from 10.14% in 1929, and then doubled again by 1936. Research conducted last year by Ellen McGratten of the Federal Reserve Bank of Minneapolis suggests that these increases in capital income taxation can account for much of the 26% decline in business fixed investment that occurred in 1937-1938.
Meanwhile, after the 1935 National Labor Relations Act, union membership rose to about 25% in 1938 from about 12% in 1934. The increase in unionization was fostered by the sit-down strike...
There are important parallels between the tax and labor policies of FDR and those of President Obama. As in the 1930s, tax rates on capital income will be rising sharply with the expiration of the 2001 and 2003 tax cuts. Beginning in 2011, dividends will be taxed as ordinary income with rates increasing up to 39.6% for many taxpayers, more than double the current 15% rate. The capital gains tax rate will rise to 20% from 15%.
And like FDR, Mr. Obama has advanced unionization through his recess appointments to the NLRB and his support for "card check," a provision in the controversial Employee Free Choice Act that would allow unions to organize without holding a secret ballot vote...
There are lessons to be learned from the history of 1937-1938 but they are not the ones being taught. The Obama administration should consider these: Raising business costs by increasing capital income taxes and promoting higher unionization is a mistake that will hurt most those who they should want to help—workers who have lost jobs during this recession
Further, you have the tremendous debt overhang, which is now being absorbed by foreigners and panicked Americans. No one knows how long these buyers will continue to do so.
In other words, this is not your father's Great Depression. Obama is FDR on steroids. And that isn't good for anyone except a few insider elite.
The Case for Ben Bernanke as Mad Scientist
The opportunity for Federal Reserve Chairman Ben Bernanke to stargaze in the clear skies of Jackson Hole, Wyoming and to bond with a horse whisperer has done Bernanke some good.
The speech he just delivered, in the land where Dick Cheney roams, was almost John Wayne like in its frankness. Perhaps, after his visit with the horse whisperer, he considers himself a cowboy. Whatever he may think of himself ,though, clearly the label "mad scientist", with the emphasis on "mad" fits best.
Let us look at this Bernanke speech, delivered in the land where buffalo roam alongside Dick Cheney.
First, Bernanke gives himself, and his fellow government interventionists, a pat on the back for creating and sustaining an economy that continues to leave European governments on edge about their financial conditions. A concern that also holds true for many U.S. cities and states, indeed for the United States, itself. He pats himself on the back as high unemployment continues to linger,as home sales hit record lows and as business await news about what new regulations will suffocate the economy.
Some environment for a government employee to take a bow. But he did:
Bernanke then went on to show that he is an unabashed Keynesian:
There was only very limited talk in Bernanke's speech of savings (He only briefly mentions business fixed investment) driving an economy by producing more goods. In Bernanke's Keynesian view it is all about consumption.
Focus a man on eating fish (consumption), instead of on catching more fish, picking grapes and baking bread, and the man's economy will never grow.
Bernanke then admits that he was surprised that savings are increasing:
Doesn't Bernanke get that people throughout the land are scared out of their financial minds? That the demand for cash is soaring (Being picked up in the Fed data as additional savings) because people have no clue as to what is going to happen next in the economy? All he notices is the housing factor problem:
He does not explain how he has adjusted his forecast methods in making this forecast. Or is he using the faulty forecast methods that failed him earlier this year?
Then he proves he is insane:
Please understand what is going on here. The Fed chairman is saying that the Fed has been "very accommodative". This when the numbers put out by the Fed indicate no such thing. Take a look for yourself, until recent weeks, Fed growth has been extremely low. The M2 money supply measure over the last year has only grown 2%.
Now, we move on to Bernanke's new "tools", where he, first, pretty much states that a new one that they are using will be difficult to predict as far as its impact (My emphasis):
Now, we are back to Bernanke and his new "tools":
More on Bernanke's tools:
Tool #2 is ludicrous. Does Bernanke seriously think he is going to jawbone the economy to health? Mad.
Tool #3 Here we have a completely new tool introduced by Bernanke. The paying of interest on excess reserves, which probably has a lot to do with a trillion dollars sitting on the sidelines as excess reserves. No one knows for sure why all these excess reserves are sitting there, but they weren't there before Bernanke started paying interest on reserves. Why was this tool introduced in the middle of a crisis? Mad.
Bernanke even admits there is little experience with these tools (my emphasis):
Here is Bernake on his new tool, paying interest on excess reserves (my emphasis):
Why would you implement such a new tool that is playing some role in attracting a trillion dollars, when to do something about it might do "permanent damage" to one of the fundamental tools of monetary policy, tested and used for decades, the Fed funds rate? Mad.
Here's Bernanke on when he might use these tools:
In conclusion, one has to ask: Is implementing all these new 'tools' in the middle of a financial and economic crises the work of a sane man, when former Fed chairmen managed control of the money supply with proven tools for decades? Is Bernanke a mad scientist using the United States economy as his laboratory to experiment with new "tools"?
While Bernanke stargazes and watches a horse whisperer perform, it is probably time for the rest of America to focus on the speech he just gave in Jackson Hole and realize that this is not the work of a man that can be classified as anything other than a mad scientist.
It's really time for Ben to take his helicopter and new tools and go.
Buy "The Fed Flunks" Now:
The speech he just delivered, in the land where Dick Cheney roams, was almost John Wayne like in its frankness. Perhaps, after his visit with the horse whisperer, he considers himself a cowboy. Whatever he may think of himself ,though, clearly the label "mad scientist", with the emphasis on "mad" fits best.
Let us look at this Bernanke speech, delivered in the land where buffalo roam alongside Dick Cheney.
First, Bernanke gives himself, and his fellow government interventionists, a pat on the back for creating and sustaining an economy that continues to leave European governments on edge about their financial conditions. A concern that also holds true for many U.S. cities and states, indeed for the United States, itself. He pats himself on the back as high unemployment continues to linger,as home sales hit record lows and as business await news about what new regulations will suffocate the economy.
Some environment for a government employee to take a bow. But he did:
On the whole, when the eruption of the Panic of 2008 threatened the very foundations of the global economy, the world rose to the challenge, with a remarkable degree of international cooperation, despite very difficult conditions and compressed time frames. And when last we gathered here, there were strong indications that the sharp contraction of the global economy of late 2008 and early 2009 had ended. Most economies were growing again, and international trade was once again expanding.Mad.
Bernanke then went on to show that he is an unabashed Keynesian:
For a sustained expansion to take hold, growth in private final demand--notably, consumer spending and business fixed investment--must ultimately take the lead.Mad.
There was only very limited talk in Bernanke's speech of savings (He only briefly mentions business fixed investment) driving an economy by producing more goods. In Bernanke's Keynesian view it is all about consumption.
Focus a man on eating fish (consumption), instead of on catching more fish, picking grapes and baking bread, and the man's economy will never grow.
Bernanke then admits that he was surprised that savings are increasing:
Among the most notable results to emerge from the recent revision of the U.S. national income data is that, in recent quarters, household saving has been higher than we thought--averaging near 6 percent of disposable income rather than 4 percent, as the earlier data showed.Mad.
Doesn't Bernanke get that people throughout the land are scared out of their financial minds? That the demand for cash is soaring (Being picked up in the Fed data as additional savings) because people have no clue as to what is going to happen next in the economy? All he notices is the housing factor problem:
Household finances and attitudes also bear heavily on the housing market, which has generally remained depressedHe then admits that major corporations are also scared out of their wits and holding large amounts of cash:
Generally speaking, large firms in good financial condition can obtain credit easily and on favorable terms; moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets.He then admits that the employment situation is a disaster:
Incoming data on the labor market have remained disappointing. Private-sector employment has grown only sluggishly, the small decline in the unemployment rate is attributable more to reduced labor force participation than to job creation, and initial claims for unemployment insurance remain high.He then confesses that the FOMC didn't expect this second leg of the downturn:
Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year.So what does Ben do at this point, right after dissing his earlier forecast? He makes another one:
I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace.Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in placeMad.
He does not explain how he has adjusted his forecast methods in making this forecast. Or is he using the faulty forecast methods that failed him earlier this year?
Then he proves he is insane:
Monetary policy remains very accommodative...Totally mad. This statement alone should get him committed.
Please understand what is going on here. The Fed chairman is saying that the Fed has been "very accommodative". This when the numbers put out by the Fed indicate no such thing. Take a look for yourself, until recent weeks, Fed growth has been extremely low. The M2 money supply measure over the last year has only grown 2%.
Now, we move on to Bernanke's new "tools", where he, first, pretty much states that a new one that they are using will be difficult to predict as far as its impact (My emphasis):
However, more recently, as the pace of economic growth has slowed somewhat, longer-term interest rates have fallen and mortgage refinancing activity has picked up. Increased refinancing has in turn led the Fed's holding of agency MBS to run off more quickly than previously anticipated. Although mortgage prepayment rates are difficult to predict, under the assumption that mortgage rates remain near current levels, we estimated that an additional $400 billion or so of MBS and agency debt currently in the Fed's portfolio could be repaid by the end of 2011...Any further weakening of the economy that resulted in lower longer-term interest rates and a still-faster pace of mortgage refinancing would likely lead in turn to an even more-rapid runoff of MBS from the Fed's balance sheet.Bottom Line: The Fed is using a "tool" that is difficult to predict as far as its unfolding and eventual impact. Mad.
Now, we are back to Bernanke and his new "tools":
The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.Keep in mind Bernanke, here, is referring to his new tool, and not the three long-used Fed monetary policy instruments: control of the Fed funds rate, control of reserve requirements and control of the discount rate. These instruments all worked fine. Why introduce new "tools" that are not clearly understood as far as their impact? Mad.
More on Bernanke's tools:
Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee's communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists--namely, that the FOMC increase its inflation goalsThe man just can't leave anything alone. Tool #1 is closest to a traditional tool as it requires the buying of Treasury securities, but instead of the Fed buying short-term securities, it calls for the purchase of long-term securities, which is a type of policy that has not been tested overtime. Why would you launch this untested program in the middle of a financial crisis? Mad.
Tool #2 is ludicrous. Does Bernanke seriously think he is going to jawbone the economy to health? Mad.
Tool #3 Here we have a completely new tool introduced by Bernanke. The paying of interest on excess reserves, which probably has a lot to do with a trillion dollars sitting on the sidelines as excess reserves. No one knows for sure why all these excess reserves are sitting there, but they weren't there before Bernanke started paying interest on reserves. Why was this tool introduced in the middle of a crisis? Mad.
Bernanke even admits there is little experience with these tools (my emphasis):
I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions. However, the expected benefits of additional stimulus from further expanding the Fed's balance sheet would have to be weighed against potential risks and costs. One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions... uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responsesMad.
Here is Bernake on his new tool, paying interest on excess reserves (my emphasis):
A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. Inside the Fed this rate is known as the IOER rate, the "interest on excess reserves" rate. The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero. On the margin, a reduction in the IOER rate would provide banks with an incentive to increase their lending to nonfinancial borrowers or to participants in short-term money markets, reducing short-term interest rates further and possibly leading to some expansion in money and credit aggregates. However, under current circumstances, the effect of reducing the IOER rate on financial conditions in isolation would likely be relatively small. The federal funds rate is currently averaging between 15 and 20 basis points and would almost certainly remain positive after the reduction in the IOER rate. Cutting the IOER rate even to zero would be unlikely therefore to reduce the federal funds rate by more than 10 to 15 basis points. The effect on longer-term rates would probably be even less, although that effect would depend in part on the signal that market participants took from the action about the likely future course of policy. Moreover, such an action could disrupt some key financial markets and institutions. Importantly for the Fed's purposes, a further reduction in very short-term interest rates could lead short-term money markets such as the federal funds market to become much less liquid, as near-zero returns might induce many participants and market-makers to exit. In normal times the Fed relies heavily on a well-functioning federal funds market to implement monetary policy, so we would want to be careful not to do permanent damage to that market.
Why would you implement such a new tool that is playing some role in attracting a trillion dollars, when to do something about it might do "permanent damage" to one of the fundamental tools of monetary policy, tested and used for decades, the Fed funds rate? Mad.
Here's Bernanke on when he might use these tools:
Each of the tools that the FOMC has available to provide further policy accommodation--including longer-term securities asset purchases, changes in communication, and reducing the IOER rate--has benefits and drawbacks, which must be appropriately balanced. Under what conditions would the FOMC make further use of these or related policy tools? At this juncture, the Committee has not agreed on specific criteria or triggers for further action...It should be noted that the three basics were never seen in a "benefits and drawbacks" manner. This is really all about the new "tools", which really brings to the forefront and, the question: Why are all these new tools being developed and implemented, to varying degrees, in the middle of a financial crisis? Mad.
In conclusion, one has to ask: Is implementing all these new 'tools' in the middle of a financial and economic crises the work of a sane man, when former Fed chairmen managed control of the money supply with proven tools for decades? Is Bernanke a mad scientist using the United States economy as his laboratory to experiment with new "tools"?
While Bernanke stargazes and watches a horse whisperer perform, it is probably time for the rest of America to focus on the speech he just gave in Jackson Hole and realize that this is not the work of a man that can be classified as anything other than a mad scientist.
It's really time for Ben to take his helicopter and new tools and go.
Buy "The Fed Flunks" Now:
Alert: Bernanke to Speak
Fed Chairman Ben Bernanke is scheduled to speak this morning on the economy and policy, in Jackson Hole, Wyoming, . Scheduled speech time is 10:00 AM ET.
This is a likely market mover. There will be no live coverage, so all the power for first reactions will be in the hands of the wire service writers. Markets will react to whatever headlines they see coming across the wires. A second wave of market activity is likely to hit after analysts read the speech and start putting out analysis.
Whatever he says, given the weak economy, the Fed is likely to take more aggressive easing measures. Since it is my view that the Fed is not entirely sure how its various new Bernanke "tools" will work, we will just have to see what Bernanke and the Fed proposes before analyzing the impact of such measures.
This is a likely market mover. There will be no live coverage, so all the power for first reactions will be in the hands of the wire service writers. Markets will react to whatever headlines they see coming across the wires. A second wave of market activity is likely to hit after analysts read the speech and start putting out analysis.
Whatever he says, given the weak economy, the Fed is likely to take more aggressive easing measures. Since it is my view that the Fed is not entirely sure how its various new Bernanke "tools" will work, we will just have to see what Bernanke and the Fed proposes before analyzing the impact of such measures.
GDP Revision: Significant Drop
One of my least favorite indicators is GDP, because of the super aggregation of the number and the problem of collecting quality data.
Nevertheless analysts will focus on this number, Today, real gross domestic product (GDP) grew at an annual rate of 1.6 percent in the second quarter of 2010. This is the second estimate--the first estimate was 2.4%. This follows a growth rate of 3.7 percent in the first quarter.
The exact number is not as important to look at as the trend, and the trend is clearly down, indicating the significant problems in the economy as a result of a knee-jerk Fed money manipulation policy and the uncertain regulatory environment for business.
Nevertheless analysts will focus on this number, Today, real gross domestic product (GDP) grew at an annual rate of 1.6 percent in the second quarter of 2010. This is the second estimate--the first estimate was 2.4%. This follows a growth rate of 3.7 percent in the first quarter.
The exact number is not as important to look at as the trend, and the trend is clearly down, indicating the significant problems in the economy as a result of a knee-jerk Fed money manipulation policy and the uncertain regulatory environment for business.
How Capitalism Saved America
Tomorrow at 1PM CT on Radio Free Market, Thomas DiLorenzo will be interviewed on How Capitalism Saved America.
DiLorenzo teaches Austrian Economics at Loyola University, Maryland, an associate of the Mises Institute and is the author of How Capitalism Saved America - which is the direct inspiration of the interview.
The interview will be broadcast over the internet, here.
DiLorenzo teaches Austrian Economics at Loyola University, Maryland, an associate of the Mises Institute and is the author of How Capitalism Saved America - which is the direct inspiration of the interview.
The interview will be broadcast over the internet, here.
Is Anna Chapman a Kinsellian?
Stephan Kinsella holds that intellectual property, including copyright, is incompatible with libertarian property rights principles.
I hold a different view, but it appears Russian spy Anna Chapman is a practicing Kinsellian. WSJ reports:
A celebrity magazine accused deported Russian spy Anna Chapman of copyright violation after she posed for a photo spread and then posted one of the shots on Facebook more than a week ahead of the spread's scheduled publication.
A celebrity magazine accused deported Russian spy Anna Chapman of copyright violation after she posed for a photo spread and then posted one of the shots on Facebook more than a week ahead of the spread's scheduled publication.
The photo, showing the red-haired femme fatale in a low-cut white dress seated by a window overlooking the Kremlin, marks her return from two months' seclusion following her arrest and the much-publicized U.S.-Russia spy swap. The photo, posted earlier this week, drew rave reviews from her Facebook friends and circulated widely before the flap with its owner, Zhara (Russian for Heat) magazine.LifeNews.com, the online version of a paper owned by the magazine's publisher, has posted the below video to promote the picture spread.
On Thursday she took down the photo without explanation and posted a new profile picture on her Facebook page—in a high-necked white dress by a lake. That photo wasn't part of the magazine spread that is due to be published Wednesday
WSJ on Elizabeth Warren's Inside Track
WSJ's Damian Paletta writes:
I told him that to me she looks like a one woman wrecking crew that has no idea what guidelines mean. I mentioned that she somehow managed to study and include in a TARP oversight role the topic of nationalizing the banking system. He told me that it was her duty to look at extremes. I asked if what she was doing is looking at extremes, and not just looking at nationalizing the banking system, why didn't she look at the other extreme, free banking.
He didn't reply, then told me she is real smart. I replied, "That's the worst kind of interventionist."
White House advisor Valerie Jarrett is playing a central role in the Obama administration’s deliberations over whom to pick to run the Bureau of Consumer Financial Protection, two people familiar with the matter said.A Federal Reserve employee told me that most of the worker bees that will be working at the Consumer Financial Protection Bureau have already been ID'd from similar agencies already within the Fed. "She won't have that much impact outside the guidelines of her mandate."
Jarrett’s involvement could bode well for Harvard Law School professor Elizabeth Warren, considered a top candidate for the potential job. Jarrett and Warren have met multiple times in the last year and are considered to be close.
They lunched together on July 21, the day President Barack Obama signed the financial-overhaul bill into law. They met again at the White House a few weeks later, along with David Axelrod, another White House advisor.
Warren, Jarrett, and Axelrod also met in January on the day before the White House announced its plans to push for stricter curbs on banks.
An administration official didn’t dispute Jarrett’s role, but said she was part of a team of officials engaged in the search.
“The process is being run by a combination of senior advisors including Valerie Jarrett and [White House senior advisor Pete Rouse and key members of the economic team Larry Summers and Tim Geithner,” the official said.
I told him that to me she looks like a one woman wrecking crew that has no idea what guidelines mean. I mentioned that she somehow managed to study and include in a TARP oversight role the topic of nationalizing the banking system. He told me that it was her duty to look at extremes. I asked if what she was doing is looking at extremes, and not just looking at nationalizing the banking system, why didn't she look at the other extreme, free banking.
He didn't reply, then told me she is real smart. I replied, "That's the worst kind of interventionist."
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