Shocking Video of People In Line for Food in Venezuela.

This is what you get when you mix hyperinflation and price controls.




(ht Michael Welling

“The Output Gap Appears Closed”

The Federal Reserve Board released an updated version of its large-scale model on the U.S. economy that may hold clues into why policy makers pivoted at their meeting earlier this week toward a December interest-rate increase, reports Bloomberg.

The revised inputs and calculations suggest the economy will use up resource slack by the first quarter of 2016, according to an analysis by Barclays Plc, and that also indicates Fed staff lowered their near-term estimate for how fast the economy can grow without producing inflation -- a concept known as potential growth.

“The output gap appears closed,” said Michael Gapen, chief U.S. economist at Barclays’s investment-banking unit in New York. “This means further progress would lead to resource scarcity and potential upward pressure on inflation in the medium term.”

It's a bit about an output gap, but it's more about changes in the demand to hold cash balances and about Fed money printing but the price inflation pressure is building. I have been accelerating my warnings in the EPJ Daily Alert that price inflation in 2016 will surprise most. I expect 3% first, as measured by government price indexes, followed by a jump to 5%.

 -RW

Why We Need Private Property to Deal with Scarce Resources

By Patrick Barron

Scarcity of resources exists in many forms and is the problem in economics. If resources were not scarce, there would be no need to economize. The existence of scarcity is true of all resources (such as time, human energy, and natural resources). However, it is not necessarily intuitive that allowing scarce resources to be owned privately is the solution to this problem.

Consequently, socialism appears attractive to many and they turn to having all resources owned collectively for the “common good.” Unfortunately, a society which spurns private property — and hands resources over to government planners instead — often learns the terrible lessons of central planning and the tragedy of the commons (i.e., commonly held resources will be plundered to extinction).

If society spurns allowing private ownership of resources, it must find some other means to prevent the tragedy of the commons and to allocate goods. Historically, the means chosen is the use of force and central planning. Throughout history, most of mankind has been divided into a hierarchical system of masters and slaves with some gradations between the two extremes. The masters (pharaohs, emperors, kings, sultans, warlords, etc.) devised complex rules-based systems for resource distribution that were decided by a small number of people and not by markets. And ultimately, these plans depended upon pure terror for enforcement. But this so-called solution to the problem of scarcity — restricting the people’s liberty through the use of force — does not work.

Problem 1: We Can’t Economize Without Effectively Ordering Our Preferences First

Lowenstein's Stranger Than Fiction Story of the Fed

By Ad Libertati

The Los Angeles Times carries an Op-Ed from Roger Lowenstein which is the most revisionist piece of U.S. banking history I've ever seen.  Lowenstein appears to be a major apologist for the Fed (and central banking in general), and launches several attacks on sound banking and libertarians.  Here's a sampling:

The Fed's unpopularity would make sense if it had, say, failed to intervene and save the system during the 2008 financial crisis. But, in fact, the Fed did rescue the economy ... 

Its reputation would likewise make sense if it were jacking up interest rates, foisting hardship on ordinary Americans. But the Fed has maintained a low rate policy, stimulating the economy while keeping the dollar strong and inflation low.

Firstly, the Fed rescuing the economy bit is propaganda.  The reality is that the Fed injected a bunch of new money, re-inflating the bubble and preventing a necessary correction from clearing out all of the malinvestments.  And, the low interest rates do foist hardship on ordinary Americans, especially those on fixed incomes.  It has stimulated the economy, sure, but that is a negative, as it is the cause of the dreaded business cycle.

At Alexander Hamilton's urging, Congress first chartered a national bank — the ur-Fed — in 1791. However, Thomas Jefferson, who famously mistrusted banks (he thought agriculture more virtuous), and who was fearful of a strong central government, opposed this development. After 20 years, the Jeffersonians won and Congress let the charter expire. 

This decision led to disaster: ruinous inflation.  

Hamilton was completely corrupt and the First Bank of the U.S. immediately embarked on an inflationary policy.  The inflation occurred throughout the bank's charter with wholesale prices rising 72% between 1791 and 1796 alone.  The bank's charter ended in 1811, and an inflation occurred shortly thereafter.  Why?  Because there was a war starting in 1812, and during the war the government encouraged reckless banking practices, creating additional money to loan to the government.  Yes, the inflation occurred because of war, not because the bank was ended ... in fact, had the charter been renewed, it likely would have led to greater inflation, as the government could have asked the First Bank to keep giving it more money.  The fact that Lowenstein leaves this information out shows that he's simply a propagandist for central banking.  But, we continue:

So Congress chartered a Second Bank of the United States, which began in 1817, providing the growing country with a better, more uniform currency and improved its public finances. But success couldn't save it. Andrew Jackson despised the Second Bank as a tool of East Coast elites, and it too was abolished.

Sure.  And the Second Bank immediately "launched a spectacular inflation of money and credit" [note:  the real facts here are from Rothbard, with more info at the bottom of this post].  The Second Bank had a much lower reserve ratio than the First Bank and its policies led to the first major banking crisis in the U.S. (the Panic of 1819).  Again, Lowenstein has left this out.  Monetary inflation by the Second Bank caused dramatic price inflation and a recession.  It did "improve its public finances", if by that you mean, allow the government to obtain more money cheaply.

For most of the 19th century, the U.S., unlike most nations in Europe, did not have a lender of last resort. Frequent panics and credit shortages were the result ... 

After a financial panic in 1907 virtually shut down the banking system, reformers began to press once more for a central bank. 

The panics in those countries with central banks are ignored.  The frequent panics of the 19th century in the U.S. were a product of "wildcat" banking (excluding those panics during the First and Second bank periods, which have already been touched on).  Wildcat banking was essentially a practice where banks would set up, and issue their own bank notes in dramatic excess of their gold reserves.  The wildcat banks would be located where other banks would find it difficult to send the bank notes for redemption in gold, allowing rapid credit expansion.  And, due to the highly inflationary credit practices, when the bust would occur, the various U.S. State governments would allow the banks to suspend payment in gold.  With no real consequences, the wildcat banking practices continued, relatively unabated.

The only really accurate part of the article is the one I'm not including (the conspiracy in Jekyll Island to create the Fed).  And again Lowenstein points to panics when there is no central bank and ignores them when they are.  The Fed had been around for more than a decade when the Great Depression happened (due to the Fed's monetary expansion in the 1920s), but that's far from the only one.  We also have the banking crisis of 1920, the stagflation of the 1970s, the 1980s recession, the savings and loan crisis, the early 1990s recession, the dotcom bubble, and of course, the financial crisis of 2007.  Curious how Lowenstein points to the frequent panics in periods without a central bank, but ignores them in periods where there is one.

Lowenstein then finishes the article with:

The Federal Reserve today is not perfect. But it is more transparent than ever, thanks to reforms instituted by the previous chairman, Ben S. Bernanke, and it is no less necessary than was a central bank in 1791. Americans' paranoia is unjustified, just as it has always been.

He is correct in all of this except the last sentence.  The Fed is not perfect.  It is more transparent than ever, but that's not saying much, as it's never been transparent.  And it is no less necessary than was a central bank in 1791, in that, neither was or is necessary at all.  But American paranoia is fully justified as the Fed continues its monetary expansion unabated.  And the next central bank induced crisis will inevitably occur at some point, and apologists like Lowenstein will then tell us how the Fed saved us all.

Lowenstein is peddling his book (America's Bank: The Epic Struggle to Create the Federal Reserve), which should only be read for the laughs, I presume (based on this article).  Instead, if you want a real history of U.S. banking, I recommend Murray Rothbard's "A History of Money and Banking in the United States:  the Colonial Era to World War II".  It was the source of the facts in this article used to rebut Lowenstein (of course, any errors would be mine).

BANKSTER: Fed Rate Hike Will Be Good for the Stock Market

Banksters are continuing to carpet bomb with propaganda tp prepare markets for a possible December rate hike.

Strategists at J.P. Morgan say that Fed shift doesn’t necessarily spell doom for this stock market, reports Barbara Kollmeyer at MarketWatch.

The Fed will only hike as long as economic data allow it, Mislav Matejka, J.P. Morgan’s global equity strategist, and his team said in a note on Monday. That includes a pickup in U.S. payrolls picking up and a stabilization in Chinese economic activity into year-end.

Secondly, the central bank won’t make a move if financial markets, which suffered a big selloff in August, start to send “renewed warning signals.”

“If the Fed does hike in December, this should be interpreted as a conformation that improving sentiment is sustainable, in our view, and should be a positive for equity markets,” said Matejka.

All true, though a 25 basis point rate hike is not going to have much impact in the first place, especially if price inflation begins to accelerate in 2016 as I expect it will.

 -RW

Shark Tank Investor Kevin O’Leary Exercise Routine Verified

Zero Hedge is featuring this list of early morning routines that was broadcast via Twitter by the World Economic Forum:

In an expansion on the list, ZH reports this:

They exercise before it falls off the to-do list.

The top morning activity of the rich and powerful seems to be exercise, be it lifting weights at home or going to the gym.

For example, Vanderkam notes that Xerox CEO Ursula Burns schedules an hour-long personal training session at 6 a.m. twice a week. Plus, “Shark Tank” investor Kevin O’Leary gets up at 5:45 every morning and jumps on the elliptical or exercise bike, and entrepreneur Gary Vaynerchuk starts every day with an hour-long workout with his trainer. “These are incredibly busy people,” says Vanderkam. “If they make time to exercise, it must be important.”

Beyond the fact that exercising in the morning means they can’t later run out of time, Vanderkam says a pre-breakfast workout helps reduce stress later in the day, counteracts the effects of high-fat diet, and improves sleep.

I can verify the O'Leary workout, He was in San Francisco about a week ago, apparently staying at the hotel affiliated with my gym. He showed up at the gym, although, I think it was closer to 5:30 than 5:45.

A newspaper in hand, he eyed the gym equipment and stepped on a jogging machine.

 -RW

BEWARE The 4% Muni Bond Yield Scam

Jason Zweig at WSJ is very good on this:

Overstating the expected income on municipal bonds in brokerage or advisory accounts is one of the most pervasive and persistent ways the financial industry fools the investing public. It was going on when I was a cub bond-market reporter in 1988, and it’s still going strong. It’s high time investors fought back.

The Barclays Municipal Bond Index, a measure of the market for these tax-free bonds issued by state and local authorities, yields 2.2%. Even the Vanguard Long-Term Tax-Exempt Fund, which specializes in municipal debt maturing many years in the future, yields only 2.3%.

So how can so many brokers and financial advisers be such astute bond-pickers that they can claim to be earning yields of 4% and up without jeopardizing your capital?

They can’t. Those yields are an illusion.

You would never know it from looking at your account statement, however. Brokers and financial advisers are able to report the yield on many municipal bonds without adjusting for an inevitable decline in their price—thus significantly overstating the income you will earn.

To understand why, note that in a world of low interest rates, bonds are often issued at a “premium over par,” or initial price greater than $100 per $100 of par or principal value. But they almost always mature—or are “called,” if the issuer buys them back before maturity—at $100.

Imagine this streamlined example: You pay $110 for a bond that pays 4% interest and matures four years from now. Each year, you will earn $4 in interest on each $100 you have invested in the bond. And when it matures, you will get $100 back—not $110.

So you will earn $16 in simple interest but lose $10 on your principal at maturity, a total gain of $6. Your adjusted return is nowhere near 4% per year; it’s approximately 1.5% ($6 divided by four).

Read the rest here.

Minimum Wage Logic in San Francisco

Cruz Comes Under Heavy Attack For Advocating the Gold Standard

With the headline Ted Cruz Embraces Fringe Monetary Policy That Went Out Of Style In The 1930s, Think Progress is going after Cruz for his advocacy of a gold standard during last week's debate:

At Wednesday night’s GOP presidential debate, Sen. Ted Cruz (R-TX) called for returning to a policy idea that died in 1933 and has gone unmourned ever since. 

“We need sound money,” Cruz said when asked about Federal Reserve policy by CNBC’s Rick Santelli. “And I think the Fed should get out of the business of trying to juice our economy and simply be focused on sound money and monetary stability, ideally tied to gold.” 

American money hasn’t been based on the price of gold since the early months of Franklin Roosevelt’s presidency. Returning to a “gold standard,” as the policy was known, would send the broader economy into the kind of jittery and deadly tremors usually seen only in lab mice who’ve been fed cocaine. 

The idea of “sound money,” as the libertarian crowd that worships the gold standard prefers to call it, is that it takes away the Fed’s ability to manage the value of a dollar. The supposed benefit of this is that your money’s worth is more real because it is pegged to a shiny, rare metal. 

But when you let the market for gold determine the value of every piece of paper money in every person’s pocket on any given day, you leave your entire economy exposed to catastrophe. The gold standard forced governments around the world to restrict monetary policy just as markets crashed in the late 1920s, which helped turn a crash into the Great Depression.

Actually, it was the Federal Reserve  de facto move away from a true gold standard as Murray Rothbard chronicled in America's Great Depression that caused the economic collapse (and aggravated by government intervention into the economy).

As for gold versus government paper money, there has never been a hyper-inflation crack-up when gold was the medium of exchange, quite different from the record under paper currencies.

The Washington Post has reported:

This is not complicated to understand. The theory was sound in the 1930s and it is sound today: Governments can't print gold, but they sure can print horrific amounts of paper currency, and they have done so many times.

 -RW

Roger Stone: Trump to Make Comments on Monetary Policy That Will Shake Up the Political Establishment

During an interview with Lew Rockwell, "former" Donald Trump adviser Roger Stone told Lew that Trump is likely to make some comments in the near future about monetary policy that will "shake up the political establishment."  (Comment at roughly the 7:43 mark)



 -RW

Buy at Totalitarianism's Peak?

FT is out with a Gideon Rachman feature section, Where are the world’s riskiest property buys?

He writes:

[A]s I travel the world, I can’t stop thinking about property prices. In fact, my interest in property is only stimulated by my day job as the FT’s foreign affairs commentator. As I stare into estate agents’ windows in cities around the world, I find myself wondering how local political conditions are going to affect property prices.

I have even developed a theory of how global property investors should think about geopolitics — call it “the geopolitical play”. The thing to look for is a combination of good fundamentals and bad times. In other words, a place that should be prime real estate, but that has been messed up by politics. The idea is to buy now, when times are bad, and wait for politics and property prices to improve.

The problem, of course, is to know when totalitarianism is peaking and when it still has decades to go. Rachman understands this:

However, anybody tempted to make a geopolitical property play needs to keep in mind many different considerations. I would point to four in particular: timing, morality, currency and security of tenure.

The case of Cuba brings together all of these considerations. As a young journalist in 1990, I was inspired by colleagues who had made their careers by having the foresight to move to Prague or Warsaw, just before the collapse of communism. I considered making a similar move to Havana to await the counter-revolution. Thank goodness I didn’t, because I would have been waiting a long time. Since political change has been slow to come to Cuba, Havana, the capital, has not enjoyed anything like the same property boom as places such as east Berlin or Moscow.

However, as John Paul Rathbone reports, things are now beginning to move in Havana with the restoration of diplomatic relations between the US and Cuba.

Still, if you get the timing right, the rewards can e significant. The story contains this table and pay extra attention to the East Berlin play (Note well: The 1991 price was 2 years after the Berlin Wall came down) :

Where are the plays now? FT says there may be a second opportunity with Moscow.

Jack Farchy, the FT’s Moscow correspondent, writes: “For expats accustomed to boom-time Moscow of the past decade, the collapse in the rouble has raised a tantalising possibility: entering the real estate market at knockdown prices. ‘Business class’ residential property prices have fallen about 45 per cent since the end of 2013 according to Alexander Shatalov, head of IntermarkSavills. That means a small flat in central Moscow, such as the one I live in, might sell for about $300,000. That does not suggest an opportunity on the scale of the 1990s, but it still tempts. Shatalov reckons the market is bottoming out. Nonetheless, I am holding off. The future of Moscow property prices depends more than anything on the price of oil and President Putin’s foreign policy...

And there may be much more upside to Havana, but its complicated.  John Paul Rathbone, FT Latin America editor, explains:

Today, although there is a chronic shortage of housing, lots of foreigners are wondering again if they can buy a slice of Havana, the “Paris of the Caribbean”, as it was once known. Most assume they can waltz up, put money down and watch their asset’s value grow. Prices certainly seem to be spiralling up. But it is not so simple, thankfully. In my limited experience, the best way to get things done in Cuba is by making sure everyone benefits. One legal problem: only resident Cubans are allowed to own property. That means you need to find someone you can trust enough to hold title while you finance the project. Marriage offers some guarantee. But you hear as many happy stories as unhappy ones.

For the very daring there is  Kinshasa, Congo. Tom Burgis, FT investigations correspondent and a former correspondent in Africa, writes:

 Today, a geopolitical play on Kinshasa might seem insane. Joseph Kabila is showing every sign of wanting to blow a hole in the constitution to extend his presidency beyond term limits. The national fuse has been lit once more.

But what if Kabila, for years said to be happier playing computer games than engaging in matters of state, stood aside instead? That is conceivable, if still a long shot. Congo just might stage a respectable transition. Its many fine minds might be unleashed. Kinshasa has the style, the music, the bars. It is a dash of tarmac and some hydroelectric power away from really humming.

 -RW

The Next Big Thing: Mirrored Houses

Mirrored façades are creating homes that are part art installation, part camouflaged hideaway – their appearance changing with the season, weather and even hour, reports FT.

The Beginning of the Death of the US Dollar?

China's currency, the renminbi, posted its biggest one-day gain ever on Friday, as traders said China’s central bank appeared to have intervened.

The renminbi closed 0.62 per cent stronger in the onshore market, its best day since China’s landmark de-pegging of its currency in 2005. The currency is now at Rmb6.3175 a dollar, its strongest level since the People’s Bank of China surprised global markets on August 11 by letting the renminbi depreciate. The renminbi is still 1.8 per cent weaker than at the start of 2015.

In the offshore CNH market, the renminbi was trading 0.27 per cent stronger at Rmb6.3325 late on Friday.

The intervention quite likely included PBOC sales of US Treasury securities. The sales raise dollars which then can be used to prop up the renminbi.

To date, Chinese sales of Treasury securities have been absorbed fairly well by the markets, but there is likely a tipping point where sales result in major downward price pressure on the bills and notes---and the dollar itself.

 -RW

EPJ Bestselling Books in the Month of October 2015

Combined list for EconomicPolicyJournal.com and Target Liberty.

1.  How to Lie With Statistics by Darrell Huff. Because of How to Make Seductive Nonsensical Causal Argument

2. Prices and Production by Friedrich Hayek. Because of When Friedman Readily Admitted He Didn't Understand Hayek's 'Prices and Production'

3.  Signals: The Breakdown of the Social Contract and the Rise of Geopolitics by Pippa Malmgren. Because of this: How a Few Men on Wall Street End Up Setting National Economic and Monetary Policy

4.   Wealth, Poverty and Politics: An International Perspective by Thomas Sowell (Second month on list)

5. Million Dollar Habits: 10 Simple Steps To Getting Everything You Want In Life by Robert Ringer. Because of this. Elevent appearance on list.  Most recently because of  Why I Am Not Going to Be Reviewing Charles Koch's New Book

6. How to Be Rich by J. Paul Getty Because of  Why I Am Not Going to Be Reviewing Charles Koch's New Book.

7.The Lucifer Effect by Philip Zimbardo. Because of this.

8. The Clinton's War on Women by Roger Stone and Robert Morrow. Because of this.

9. The Case for Gold: A Minority Report of the U.S. Gold Commission by Ron Paul and Lew Lehrman. Because of Ben Bernanke on Ron Paul's Understanding of the Gold Standard.

10.  Out of Poverty: Sweatshops in the Global Economy by Benjamin Powell (Second month on list)

IT BEGINS: Government to Pay Doctors to Tell Patients to Kill Themselves

The federal government is about to pay doctors who speak with patients about the type of medical care they want when they are "near death."

The rule announced on Friday by the Centers for Medicare and Medicaid service will reimburse, starting January 1, 2016, healthcare providers if they have conversations with Medicare patients about advance planning--also known as end-of-life discussions, reports WSJ.

Make no mistake about it, this is about cutting the cost for the government of patient care,

Notes WSJ:

It is a delicate issue, however, because end-of-life discussions also are likely to lower health-care spending—which could lead to claims the conversations are a way to limit treatment or care.

I have had discussions with senior executives of healthcare firms who tell me that this will be a means to cut off treatment for many who will be deemed unlikely to live, but of which a percentage (approx. 10%) would likely survive their illnesses.

They say what will happen is an attractive girl trained in these "advance planning" talks will come in with slick brochures showing pictures of people in horrific states and saying to a  patient, "Do you want to live in this state and burden your family?," when in fact the patient is being asked to sign-off on the cutting-off of treatment at a point unlikely to be anywhere near the state portrayed in the brochure picture.

And don't think this is just about Medicare and Medicaid patients, It is the first step. The current government-controlled crony health insurance sector will also benefit from these kill-yourself talks.

Bottom line: When you are a drain on government coffers rather than a taxpayer, and the crony health insurance sector fears you will become expensive to keep alive, the government would rather see you dead.

It is another way that research into drugs to extend lives of people, who possibly can recover from severe illnesses, will be disincentivized, while treatment will stop on others that have a chance of recovering from a serious illness.

 -RW

Behind the Scenes on the Bond Movie ‘Spectre’