Government the Destroyer
Llewellyn H. Rockwell, Jr.Monday January 28, 2008
This talk was delivered at the 2008 Mises Circle in Houston.
The claim of the Austrian School that has scandalized members of other schools for 150 years is the following. The propositions of economics are universal. The principles apply in all times and all places, because they derive from the structure of reality and human action.
What brought about economic growth, inflation, or the business cycle in China 300 BC are the same institutions that drive phenomena in the United States in AD 2008. The circumstances of time and place change, but the underlying economic reality is identical.
That claim has made other economists – to say nothing of sociologists, historians, and politicians – scatter like pigeons. The Historical School poured scorn on this idea, and Carl Menger, the founder of the Austrian School, fought them tooth and nail. The Chicago School of positivists found the claim preposterous, and Mises and Hayek and Rothbard battled them. The Keynesians have long been outraged, and the postwar Austrian generation reasserted the truth. The socialists, who posit that rearranging property titles will transform all of reality, say that the claim is absurd, capitalistic nonsense.
But there it stands. No matter where or when, the essential prerequisite for economic growth is capital accumulation in a framework of freedom and sound money. The consequence of price control is shortage and surplus. The effect of money expansion is inflation and the business cycle. The effect of every form of intervention is to make society less prosperous than it would otherwise be.
The list of universals is endless, which is why every age needs good economists to explain and articulate the truth.
Well, I would like to add that there are universal fallacies too.
Frédéric Bastiat pointed to one: the belief that the destruction of wealth fuels its creation. He explains this by means of an allegory that has come to be known as the story of the broken window. Most famously it was retold as the opening of Henry Hazlitt's Economics in One Lesson, which is probably the bestselling economics book of all time.
A kid throws a rock at a window and breaks it, and everyone standing around regrets the unfortunate state of affairs. But then up walks a man who purports to be wise and all-knowing. He points out that this is not a bad thing after all. The man fixing the window will get money for doing so. This will then be spent on a new suit, and the tailor too will get money. The tailor will spend money on other items and the circle of rising prosperity will expand without end.
What's wrong with this scenario? As Bastiat put it, "It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented."
You can see the absurdity of the position of the wise commentator when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?
It is not a good thing to destroy wealth. Bastiat puts it this way. "Society loses the value of things which are uselessly destroyed."
It sounds like an unexceptional claim. But herein rests the core case against everything the government does. Perhaps, then, we can see why the allegory is not better known. If we took it seriously, we would dismantle the whole apparatus of American economic intervention.
If you are with me to this point, perhaps you have a hard time believing that anyone really believes that wealth destruction is actually a good thing. Let me try to show that the fallacy is as pervasive as ever.
After every natural disaster, we at the Mises Institute start what we call the Broken Window Watch.
After Hurricane Katrina, the Labor Secretary said: "What will happen – and I have seen this in previous catastrophes and hurricanes – there is a bright spot in that new jobs do get created."
And The Economist said, "While big hurricanes like Katrina destroy wealth, they often have a net positive effect on GDP growth, as the temporary downturn immediately after the storm is more than made up for by the burst of economic activity that takes place when the rebuilding begins."
And the New York Times said: "Economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on growth data over the next few months as resources are channeled into rebuilding."
After last year's California fires, we heard this. "In the odd nature of economic accounting, this will probably be a stimulus," said Alan Gin, a University of San Diego economist. "There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments."
And CBS Marketwatch said: "Economists have noted the perverse reality that in the wake of disasters, re-construction spending helps the economy, even as people are still struggling to recover from their personal losses."
Note that personal loss here is deemed rather irrelevant compared with the beneficial macroeconomic results. Here we have a theme we find often in economics, the attempt to drive a wedge between what makes sense for individuals and what is good for society. We see this on display in this recessionary environment, when people are told to spend spend spend, even though most people understand that recessions are times for saving.
Continuing on, we find the Broken Window fallacy popping up even after 9-11.
Timothy Noah of Slate wrote: "We live in a very wealthy nation that responds to horrible disasters by spending large sums of money…. It will also provide a meaningful Keynesian stimulus to a national economy that, let's face it, was tottering on the brink of recession well before Sept. 11. The recession may still come, but the countercyclical spending should help shorten it."
Another economist declared: "Initially, this could provide a significant boost to an economy that had been slumping. The construction industry could benefit from the rebuilding process. There may also be a boon for slumping tech sales, in replacing lost equipment."
Thus can we see the continuing relevance not only of Bastiat's allegory but also of the characters in the story. The posturing wiseguy who says that breaking windows is good for the economy keeps reappearing again and again. So entrenched is this mistake that we might call it official economic doctrine for the whole country.
I ask you to consider the absurd discussion of a stimulus package designed to rescue the economy from recession. The idea is that the government will inject funds into private markets to stimulate them to the point that they will run on their own. Not once in this debate have I heard anyone ask the core question: where is this money going to come from?
It seems that Washington wants us to believe that they have some magic machine that can turn up $150 billion in new assets without anyone having to do anything to make these assets appear. One wonders, then, why we need to wait until a recession to stimulate the economy. Why not magically create hundreds of billions every day, and not just for this country but for the entire world? Why are we holding back?
Now, the ideas of the stimulus package are not 100% awful. Some people are talking about tax cuts, which is a good thing but rather pointless without spending cuts. I'm particularly intrigued by the underlying assumption here that taxes work as a drag on an economy whereas tax cuts fuel expansion. If that is the case, and is indeed true but for different reasons than Washington gives, why wait until the recession to cut taxes? If taking less from us is good for the economy, we should institute this as a universal policy.
One great lesson of political economy, emphasized for centuries, is that the government creates no wealth of its own. Everything it has it has to get from you and me, one way or another. It can tax. It can borrow. And, finally, it can inflate by means of credit market manipulation. This third option is the most disguised. When people hear the words monetary policy, they figure that this is something they will leave to experts. And central bankers have an astonishing talent for obfuscation to the point that no one knows with certainty precisely what they are doing.
The whole show is designed to make us go to sleep and not think about what is really going on. The unvarnished truth is that when the Fed artificially lowers rates, it is creating new money that waters down the value of the existing money stock, yielding a lower purchasing power for the dollar. That's another way of saying that it creates inflation – perhaps not right away, and perhaps not across all economic sectors, but eventually and certainly.
This, my friends, is a form of breaking windows. It is wealth destruction. It matters not that there will be more dollars to spend, because prices will be higher and wealth has been drained out of the private sector, and redistributed within it. It is Bastiat's fallacy reinvented in a new form.
New money also distorts production structures. At the very time when the market is pressuring long-term investment to pull back, the lower rates encourage expansion in ways that prolong the crisis. It only delays and worsens the inevitable. The Great Depression taught us that government is capable of doing this to the point that the crisis can last for 17 years. So this is no small matter. A government determined to prevent recession is a government that might end up sustaining one to the point of the collapse of civilization itself.
It is a perverse belief, but pervasive nonetheless. It is believed by both political parties. It is held by the president, the media, and the congress (except for Ron Paul). It is a reflexive belief, one that reflects a failure to think between stages and see the unseen effects of government intervention.
One reason that Bastiat's example has power is that it applies not just in one area of policy but all areas. If it isn't true that breaking windows creates wealth, it is not true that government spending and inflating is a boon to the economy. It only ends up draining wealth from the private sector, which is the only source of wealth creation.
It doesn't matter what the government spends money on. For example, building pyramids with tax dollars is not good for the economy, despite what Keynes claimed. But neither is waging war good for us or the victim country, despite constant claims to the contrary.
It is surely one of the most deadly myths that the Second World War ended the depression. As Robert Higgs has shown, it further prolonged it, all phony data aside. And consider the spending on the war on terror. If government spending were capable of stimulating the economy, we would not have recession right now.
Chris Westley assembled some data on the last seven years of economic conditions, and it is sobering indeed. Since 2000, tax revenues are up 25%. That's wealth destruction. Government spending is setting records for expansion, with $1 trillion added to the annul budget, with military spending up $250 billion each year over the egregious $400 billion spent annually in 2000. That's wealth destruction. The national debt is up 59%. That has to be paid. More destruction.
Social security liabilities are up 60%. That too is the promise of future destruction. The money supply is up 72%. More destruction. Inflation itself has risen 20%, so the dollar of 2000 is now worth 80 cents. The gas price alone is up 118%, so that too is wealth destroyed. As an indication of economic trouble, the gold price is up 206%.
Here is the story so far of the government's great stimulus. It has led to hard economic times. More of the same will create more of the same and worse. The unemployment rate is rising. Savings are falling. Prices are rising. We are less secure, less prosperous, and we have fewer opportunities than ever to dig our way out of this mess.
Government expansion has actually created the absurd scenario mentioned above. The boy threw the rock, the crowds in Washington believed the sophist, and now they are plotting to raze all homes on the block, in the name of economic recovery.
Have we learned from the Great Depression? Ben Bernanke believes that he has learned something. He believes that the key problem of that period was a failure of the central bank to pump in enough money and credit. He has never absorbed the critical observation of Rothbard that the Fed did attempt to pump up the money supply from 1929–1934. They used every mechanism, but the credit markets found few takers, and without their cooperation, the money supply does not expand.
The real lesson of the Great Depression is that there is nothing that the central bank can do to forestall a recession whose time has come, and nothing government can do to improve the situation once the recession has arrived. Everything it attempts to do – except shrink – only ends up making matters worse.
So it is in our time. We must ask ourselves what Washington is capable of doing this time around. I believe that the answer is anything and everything. Bernanke will attempt to flood the economy with money. Washington is perfectly capable of imposing price and wage controls on the entire economy. It is capable of terrifying levels of protectionist legislation. New taxes are less likely but taxation through debt accumulation is probably inevitable. There might be rationing, spending mandates, anti-hoarding legislation, and more.
The assumption that driving up consumption is the key to prosperity is particularly dangerous, and also pregnant with irony. During good economic times, we are hounded constantly by the intellectual elites for our consumption habits. It is said that we are a greedy nation, buying ever more fripperies and not looking after the long term. The American public is decried by the intellectual elites as materialist, consumerist, and short sighted.
Then recession hits and the tune changes completely. Reliable leftists, fresh from having complained about the egregious spending habits of the American consumer, suddenly turn on a dime and tell us that more consumption is the key to economic growth. They favor policies that would get us to fork over ever more of our money, under the belief that the core problem is a lack of demand!
A recent example is Barack Obama, who said last year that the problem with popular culture is that it "saturates our airwaves with a steady stream of sex, violence and materialism." But only this week, he seemed to endorse one of the three. "If the economy continues to decline in the coming weeks, we should send checks to people," he said. "This is the quickest way to help people pay their bills and get them to start spending."
In fact, less spending and more saving is what is called for during a recession, which is nothing but a market correction writ large. Attempting to coerce spending threatens the value of the dollar itself.
Here we face a very dangerous situation. If the dollar ever ceases to be the international currency of choice, and this could happen, we could face roaring inflation. And with dreadful legislation that prohibits any kind of choice in currency, Americans will be stuck. Here is a problem that could cause near panic in Washington.
The irony here is that after a century of failed interventionism and socialism, Washington is no less likely, and probably far more likely, to take the path of least resistance and accumulate ever more power unto itself, at our expense.
We are in an election season, so of course people ask who would be the least bad person to head the state in the years ahead. The answer here is not at all clear, if it is not Dr. Paul. As with the 1930s we face a choice between militaristic fascism and Keynesian-style socialism combined with environmentalism. These are two very grim choices.
I tell you this not to spread gloom but merely to be realistic about the prospects for the future of American politics. But there is also good news to be considered. The private sector has raced so far ahead of the state, and is so global, that it is far more resilient than before. There are safety valves available in the form of international capital markets.
The government is so much bigger now than in the 1930s, but, paradoxically, that also makes it less effective than it once was, which is very good news. It is a massive, lumbering giant, whereas the markets are a speed racer.
I might also point out that the government enjoys nowhere near the respect it once had. Once the governing elite consisted of the nation's elite, coming from the best families and the best schools. Today, the governing elite has never been more transparently ridiculous and even freakish. Gone are the aristocratic public servants of yesterday; today, the government is made up of a class of hucksters and gangsters that inspires no confidence.
This is all to the good, for as Mencken said, it is always great when we do not get all the government we pay for.
On the intellectual level, the teachings of economics in the Austrian School tradition have never been more available to the world, or more frequently cited and discussed. And a recessionary environment guarantees more attention to the Austrian theory of the business cycle simply because this is the only model that makes sense of our current problems.
We should never underestimate the power of ideas to make a difference in the world. During the Great Depression, the resistance to the state was present but weak. Today we have built up a mighty intellectual army that extends across the globe. We are prepared in ways that they were not. We have thousands of students and faculty, and men and women of affairs who know real economics. We have the internet. We have new books that put the whole problem in perspective, such as Jesús Huerta de Soto's work on business cycles. We have the biography of Mises now, and it illustrates the heroism of political dissidence. The works of Rothbard on the Great Depression and central banking have never been more widely circulated and available. This time our masters in Washington will not go unopposed.
At the Mises Institute, now in our 26th year, we tried to maintain a careful balance between serious and fundamental scholarly work, and public advocacy. We must never lose sight of the need for research and detailed work. It is not enough to merely repeat slogans. At the same time, there are some foundational lessons of economics that must be taught again and again with each new generation. The fallacy of the Broken Window is one of them, and its implications are truly radical.
Both Bastiat and Hazlitt saw that the government is the great window breaker, that destroyer of wealth that drives the economy backwards. The engine of creativity, recovery, and expansion is the private sector, completely unencumbered by state intervention. Ron Paul's newest book is called Pillars of Prosperity: Free Markets, Sound Money, and Private Property. The title nicely sums up the message of the economics of freedom.
It bears repeating in every age, in all places, for we will never be completely free of the great threat of the window breaker. So long as there are governments with stones ready to throw, there will be a need for someone to point out that destruction is never productive, never beneficial, and never a path to the good life that we all seek.
Tuesday, January 29, 2008
Our Liberty Is In Danger
American Liberty Teetering on Edge of Abyss
Paul Craig RobertsLew Rockwell.comMonday January 28, 2008
"Your papers please" has long been a phrase associated with Hitler’s Gestapo. People without the Third Reich’s stamp of approval were hauled off to Nazi Germany’s version of Halliburton detention centers.
Today Americans are on the verge of being asked for their papers, although probably without the "please."
Thanks to a government that has turned its back on the US Constitution, Americans now have an unaccountable Department of Homeland Security that is already asserting tyrannical powers over US citizens and state governments. Headed by the neocon fanatic Michael Chertoff, the Orwellian-sounding Department of Homeland Security has mandated a national identity card for Americans, without which Americans may not enter airports or courthouses.
(Article continues below)
There is no more need for this card than there is for a Department of Homeland Security. Neither are compatible with a free society.
However, Bush, the neocons, Republicans and Democrats do not want America to any longer be a free society, and they are taking freedom away from us just as they took away the independence of the media.
Free and informed people get in the way of power-mad zealots with agendas.
It is the agendas that are supreme, not the American people, who have less and less say about less and less.
George W. Bush, an elected president, has behaved like a dictator since September 11, 2001. If "our" representatives in Congress care, they haven’t done anything about it. Bush has pretty much cut Congress out of the action.
In truth, Congress gave up its law-making powers to the executive branch during the New Deal. For three-quarters of a century, the bills passed by Congress have been authorizations for executive branch agencies to make laws in the form of regulations. The executive branch has come to the realization that it doesn’t really need Congress. President Bush appends his own "signing statements" to the authorizations from Congress in which the President says what the legislation means. So what is the point of Congress?
As for laws already on the books, the US Department of Justice (sic) has ruled that the President doesn’t have to abide by US statutes, such as FISA or the law forbidding torture. Neither does the President have to abide by the Geneva Conventions.
Other obstacles are removed by edicts known as presidential directives or executive orders. There are more and more of these edicts, and they accumulate more and more power and less and less accountability in the executive.
The disdain in which the executive branch holds the "separate and equal" legislative branch is everywhere apparent. For example, President Bush is concluding a long-term security agreement with the puppet government he has set up in Iraq. Prior to September 11, 2001, when the President became The Decider, a defense pact was a treaty requiring the approval of Congress.
All that is now behind us. General Douglas Lute, President Bush’s national security adviser for Iraq says that the White House will not be submitting the deal to Congress for approval. Lute says Bush will not be seeking any "formal inputs from the Congress."
"There is no question that this is unprecedented," said Yale Law School Professor O. Hathaway.
Bush can do whatever he wants, because Congress has taken its only remaining power – impeachment – off the table.
The Democratic Party leadership thinks that the only problem is Bush, who will be gone in one year. Besides, the Israel Lobby doesn’t want Israel’s champion impeached, and neither do the corporate owners of the US media.
The Democrats are not adverse to inheriting the powers in Bush’s precedents. The Democrats, of course, will use the elevated powers for good rather than for evil.
Instead of having a bad dictator, we’ll have a good one.
Paul Craig RobertsLew Rockwell.comMonday January 28, 2008
"Your papers please" has long been a phrase associated with Hitler’s Gestapo. People without the Third Reich’s stamp of approval were hauled off to Nazi Germany’s version of Halliburton detention centers.
Today Americans are on the verge of being asked for their papers, although probably without the "please."
Thanks to a government that has turned its back on the US Constitution, Americans now have an unaccountable Department of Homeland Security that is already asserting tyrannical powers over US citizens and state governments. Headed by the neocon fanatic Michael Chertoff, the Orwellian-sounding Department of Homeland Security has mandated a national identity card for Americans, without which Americans may not enter airports or courthouses.
(Article continues below)
There is no more need for this card than there is for a Department of Homeland Security. Neither are compatible with a free society.
However, Bush, the neocons, Republicans and Democrats do not want America to any longer be a free society, and they are taking freedom away from us just as they took away the independence of the media.
Free and informed people get in the way of power-mad zealots with agendas.
It is the agendas that are supreme, not the American people, who have less and less say about less and less.
George W. Bush, an elected president, has behaved like a dictator since September 11, 2001. If "our" representatives in Congress care, they haven’t done anything about it. Bush has pretty much cut Congress out of the action.
In truth, Congress gave up its law-making powers to the executive branch during the New Deal. For three-quarters of a century, the bills passed by Congress have been authorizations for executive branch agencies to make laws in the form of regulations. The executive branch has come to the realization that it doesn’t really need Congress. President Bush appends his own "signing statements" to the authorizations from Congress in which the President says what the legislation means. So what is the point of Congress?
As for laws already on the books, the US Department of Justice (sic) has ruled that the President doesn’t have to abide by US statutes, such as FISA or the law forbidding torture. Neither does the President have to abide by the Geneva Conventions.
Other obstacles are removed by edicts known as presidential directives or executive orders. There are more and more of these edicts, and they accumulate more and more power and less and less accountability in the executive.
The disdain in which the executive branch holds the "separate and equal" legislative branch is everywhere apparent. For example, President Bush is concluding a long-term security agreement with the puppet government he has set up in Iraq. Prior to September 11, 2001, when the President became The Decider, a defense pact was a treaty requiring the approval of Congress.
All that is now behind us. General Douglas Lute, President Bush’s national security adviser for Iraq says that the White House will not be submitting the deal to Congress for approval. Lute says Bush will not be seeking any "formal inputs from the Congress."
"There is no question that this is unprecedented," said Yale Law School Professor O. Hathaway.
Bush can do whatever he wants, because Congress has taken its only remaining power – impeachment – off the table.
The Democratic Party leadership thinks that the only problem is Bush, who will be gone in one year. Besides, the Israel Lobby doesn’t want Israel’s champion impeached, and neither do the corporate owners of the US media.
The Democrats are not adverse to inheriting the powers in Bush’s precedents. The Democrats, of course, will use the elevated powers for good rather than for evil.
Instead of having a bad dictator, we’ll have a good one.
This Posting From England Chills My Soul
Don't treat the old and unhealthy, say doctors
By Laura Donnelly, Health Correspondent
Last Updated: 2:09am GMT 28/01/2008
Doctors are calling for NHS treatment to be withheld from patients who are too old or who lead unhealthy lives.
Smokers, heavy drinkers, the obese and the elderly should be barred from receiving some operations, according to doctors, with most saying the health service cannot afford to provide free care to everyone.
£1.7 billion is spent treating diseases caused by smoking, such as lung cancer and emphysema
Fertility treatment and "social" abortions are also on the list of procedures that many doctors say should not be funded by the state.
The findings of a survey conducted by Doctor magazine sparked a fierce row last night, with the British Medical Association and campaign groups describing the recommendations from family and hospital doctors as "outrageous" and "disgraceful".
About one in 10 hospitals already deny some surgery to obese patients and smokers, with restrictions most common in hospitals battling debt.
Managers defend the policies because of the higher risk of complications on the operating table for unfit patients. But critics believe that patients are being denied care simply to save money.
advertisement
The Government announced plans last week to offer fat people cash incentives to diet and exercise as part of a desperate strategy to steer Britain off a course that will otherwise see half the population dangerously overweight by 2050.
Obesity costs the British taxpayer £7 billion a year. Overweight people are more likely to contract diabetes, cancer and heart disease, and to require replacement joints or stomach-stapling operations.
Meanwhile, £1.7 billion is spent treating diseases caused by smoking, such as lung cancer, bronchitis and emphysema, with a similar sum spent by the NHS on alcohol problems. Cases of cirrhosis have tripled over the past decade.
Among the survey of 870 family and hospital doctors, almost 60 per cent said the NHS could not provide full healthcare to everyone and that some individuals should pay for services.
One in three said that elderly patients should not be given free treatment if it were unlikely to do them good for long. Half thought that smokers should be denied a heart bypass, while a quarter believed that the obese should be denied hip replacements.
Tony Calland, chairman of the BMA's ethics committee, said it would be "outrageous" to limit care on age grounds. Age Concern called the doctors' views "disgraceful".
Gordon Brown promised this month that a new NHS constitution would set out people's "responsibilities" as well as their rights, a move interpreted as meaning restrictions on patients who bring health problems on themselves. The only sanction threatened so far, however, is to send patients to the bottom of the waiting list if they miss appointments.
The survey found that medical professionals wanted to go much further in denying care to patients who do not look after their bodies.
Ninety-four per cent said that an alcoholic who refused to stop drinking should not be allowed a liver transplant, while one in five said taxpayers should not pay for "social abortions" and fertility treatment.
Paul Mason, a GP in Portland, Dorset, said there were good clinical reasons for denying surgery to some patients. "The issue is: how much responsibility do people take for their health?" he said.
"If an alcoholic is going to drink themselves to death then that is really sad, but if he gets the liver transplant that is denied to someone else who could have got the chance of life then that is a tragedy." He said the case of George Best, who drank himself to death in 2005, three years after a liver transplant, had damaged the argument that drinkers deserved a second chance.
However, Roger Williams, who carried out the 2002 transplant on the former footballer, said doctors could never be sure if an alcoholic would return to drinking, although most would expect a detailed psychological assessment of patients, who would be required to abstain for six months before surgery.
Prof Williams said: "Less than five per cent of alcoholics who have a transplant return to serious drinking. George was one of them. It is actually a pretty successful rate. I think the judgment these doctors are making is nothing to do with the clinical reasons for limiting such operations and purely a moral decision."
Katherine Murphy, from the Patients' Association, said it would be wrong to deny treatment because of a "lifestyle" factor. "The decision taken by the doctor has to be the best clinical one, and it has to be taken individually. It is morally wrong to deny care on any other grounds," she said.
Responding to the survey's findings on the treatment of the elderly, Dr Calland, of the BMA, said: "If a patient of 90 needs a hip operation they should get one. Yes, they might peg out any time, but it's not our job to play God."
Last Updated: 2:09am GMT 28/01/2008
Doctors are calling for NHS treatment to be withheld from patients who are too old or who lead unhealthy lives.
Smokers, heavy drinkers, the obese and the elderly should be barred from receiving some operations, according to doctors, with most saying the health service cannot afford to provide free care to everyone.
£1.7 billion is spent treating diseases caused by smoking, such as lung cancer and emphysema
Fertility treatment and "social" abortions are also on the list of procedures that many doctors say should not be funded by the state.
The findings of a survey conducted by Doctor magazine sparked a fierce row last night, with the British Medical Association and campaign groups describing the recommendations from family and hospital doctors as "outrageous" and "disgraceful".
About one in 10 hospitals already deny some surgery to obese patients and smokers, with restrictions most common in hospitals battling debt.
Managers defend the policies because of the higher risk of complications on the operating table for unfit patients. But critics believe that patients are being denied care simply to save money.
advertisement
The Government announced plans last week to offer fat people cash incentives to diet and exercise as part of a desperate strategy to steer Britain off a course that will otherwise see half the population dangerously overweight by 2050.
Obesity costs the British taxpayer £7 billion a year. Overweight people are more likely to contract diabetes, cancer and heart disease, and to require replacement joints or stomach-stapling operations.
Meanwhile, £1.7 billion is spent treating diseases caused by smoking, such as lung cancer, bronchitis and emphysema, with a similar sum spent by the NHS on alcohol problems. Cases of cirrhosis have tripled over the past decade.
Among the survey of 870 family and hospital doctors, almost 60 per cent said the NHS could not provide full healthcare to everyone and that some individuals should pay for services.
One in three said that elderly patients should not be given free treatment if it were unlikely to do them good for long. Half thought that smokers should be denied a heart bypass, while a quarter believed that the obese should be denied hip replacements.
Tony Calland, chairman of the BMA's ethics committee, said it would be "outrageous" to limit care on age grounds. Age Concern called the doctors' views "disgraceful".
Gordon Brown promised this month that a new NHS constitution would set out people's "responsibilities" as well as their rights, a move interpreted as meaning restrictions on patients who bring health problems on themselves. The only sanction threatened so far, however, is to send patients to the bottom of the waiting list if they miss appointments.
The survey found that medical professionals wanted to go much further in denying care to patients who do not look after their bodies.
Ninety-four per cent said that an alcoholic who refused to stop drinking should not be allowed a liver transplant, while one in five said taxpayers should not pay for "social abortions" and fertility treatment.
Paul Mason, a GP in Portland, Dorset, said there were good clinical reasons for denying surgery to some patients. "The issue is: how much responsibility do people take for their health?" he said.
"If an alcoholic is going to drink themselves to death then that is really sad, but if he gets the liver transplant that is denied to someone else who could have got the chance of life then that is a tragedy." He said the case of George Best, who drank himself to death in 2005, three years after a liver transplant, had damaged the argument that drinkers deserved a second chance.
However, Roger Williams, who carried out the 2002 transplant on the former footballer, said doctors could never be sure if an alcoholic would return to drinking, although most would expect a detailed psychological assessment of patients, who would be required to abstain for six months before surgery.
Prof Williams said: "Less than five per cent of alcoholics who have a transplant return to serious drinking. George was one of them. It is actually a pretty successful rate. I think the judgment these doctors are making is nothing to do with the clinical reasons for limiting such operations and purely a moral decision."
Katherine Murphy, from the Patients' Association, said it would be wrong to deny treatment because of a "lifestyle" factor. "The decision taken by the doctor has to be the best clinical one, and it has to be taken individually. It is morally wrong to deny care on any other grounds," she said.
Responding to the survey's findings on the treatment of the elderly, Dr Calland, of the BMA, said: "If a patient of 90 needs a hip operation they should get one. Yes, they might peg out any time, but it's not our job to play God."
Ron Paul On The US Economy
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Paul: US has run out of money
Press TVMonday January 28, 2008
Republican presidential hopeful Ron Paul has criticized a US economic stimulus package based on tax-refunds, calling for 'fiscal caution'.
When asked where the money for the tax refunds - the basis of the Bush administration's stimulus package - was coming from, he told Fox News, "Where is the money coming from? We don't have any money over here in Washington."
"We have consumed everything we have gotten. So, we either have to borrow it from China or we print the money, which is inflationary. So, I'm opposed to that," he added.
Press TVMonday January 28, 2008
Republican presidential hopeful Ron Paul has criticized a US economic stimulus package based on tax-refunds, calling for 'fiscal caution'.
When asked where the money for the tax refunds - the basis of the Bush administration's stimulus package - was coming from, he told Fox News, "Where is the money coming from? We don't have any money over here in Washington."
"We have consumed everything we have gotten. So, we either have to borrow it from China or we print the money, which is inflationary. So, I'm opposed to that," he added.
Paul said the Federal Reserve moves to cut interest rates would further hurt the US dollar.
The Texas Congressman also warned that the world is losing its confidence in the US dollar as a reserve currency and called for reforms of the Federal Reserve and long-term changes.
The Texas Congressman also warned that the world is losing its confidence in the US dollar as a reserve currency and called for reforms of the Federal Reserve and long-term changes.
IMF Shock
IMF head in shock fiscal warning
Chris Giles and Gillian TettFinancial TimesMonday January 28, 2008
The intensifying credit crunch is so severe that lower interest rates alone will not be enough “to get out of the turmoil we are in”, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned at the weekend.
In a dramatic volte face for an international body that as recently as the autumn called for “continued fiscal consolidation” in the US, Dominique Strauss-Kahn, the new IMF head, gave a green light for the proposed US fiscal stimulus package and called for other countries to follow suit. “I don’t think we would get rid of the crisis with just monetary tools,” he said, adding “a new fiscal policy is probably today an accurate way to answer the crisis”.
Mr Strauss-Kahn’s words rip apart a long-standing global consensus that fiscal retrenchment in the US and Japan is needed to help reduce huge trade imbalances.
It comes as the IMF is due to release new economic forecasts this week which, he said, would show a “serious slowdown and it needs a serious response”.
Chris Giles and Gillian TettFinancial TimesMonday January 28, 2008
The intensifying credit crunch is so severe that lower interest rates alone will not be enough “to get out of the turmoil we are in”, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned at the weekend.
In a dramatic volte face for an international body that as recently as the autumn called for “continued fiscal consolidation” in the US, Dominique Strauss-Kahn, the new IMF head, gave a green light for the proposed US fiscal stimulus package and called for other countries to follow suit. “I don’t think we would get rid of the crisis with just monetary tools,” he said, adding “a new fiscal policy is probably today an accurate way to answer the crisis”.
Mr Strauss-Kahn’s words rip apart a long-standing global consensus that fiscal retrenchment in the US and Japan is needed to help reduce huge trade imbalances.
It comes as the IMF is due to release new economic forecasts this week which, he said, would show a “serious slowdown and it needs a serious response”.
The US Federal Reserve starts a regular meeting tomorrow and markets expect another half-point cut on top of the 0.75 percentage-point cut last week.
Mr Strauss-Kahn’s dramatic change in stance amazed Larry Summers, the former US Treasury secretary. He is known for saying that the IMF stands for “It’s Mostly Fiscal” because the organisation has to be tough with countries’ budgetary laxity.
But such is his concern about economic prospects if the US slows and other countries do not pick up the slack in world demand that he supported Mr Strauss-Kahn. “This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face,” said Mr Summers.
The dark economic mood in Davos was reinforced at the weekend by John Thain, the new chief executive of Merrill Lynch, who predicted the problems in subprime mortgage markets would spread to credit card and consumer loans. “It will be a while before you see a return to normality in the banking system,” he said.
Thomas Russo, vice-chairman of Lehman Brothers, said: “Absent government intervention, the economic picture is very grey but with government intervention you have a decent chance of stabilising the picture.”
The IMF’s call for countries with strong fiscal positions to loosen their budgets gained approval from Christine Lagarde, the French finance minister, and Palaniappan Chidambaram, the Indian finance minister.
Ms Lagarde suggested Germany would be a prime candidate for fiscal loosening, while Mr Chidambaram said: “India may have some room, if necessary, for some fiscal stimulus.”
Mr Strauss-Kahn’s dramatic change in stance amazed Larry Summers, the former US Treasury secretary. He is known for saying that the IMF stands for “It’s Mostly Fiscal” because the organisation has to be tough with countries’ budgetary laxity.
But such is his concern about economic prospects if the US slows and other countries do not pick up the slack in world demand that he supported Mr Strauss-Kahn. “This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face,” said Mr Summers.
The dark economic mood in Davos was reinforced at the weekend by John Thain, the new chief executive of Merrill Lynch, who predicted the problems in subprime mortgage markets would spread to credit card and consumer loans. “It will be a while before you see a return to normality in the banking system,” he said.
Thomas Russo, vice-chairman of Lehman Brothers, said: “Absent government intervention, the economic picture is very grey but with government intervention you have a decent chance of stabilising the picture.”
The IMF’s call for countries with strong fiscal positions to loosen their budgets gained approval from Christine Lagarde, the French finance minister, and Palaniappan Chidambaram, the Indian finance minister.
Ms Lagarde suggested Germany would be a prime candidate for fiscal loosening, while Mr Chidambaram said: “India may have some room, if necessary, for some fiscal stimulus.”
Banks Still Not Out Of The Woods
Banks 'face a further $300bn sub-prime hit'
By Philip Aldrick
Last Updated: 12:37am GMT 26/01/2008
The world's financial institutions will have to write down a further $300bn (£152bn) of US sub-prime losses before the crisis is over, according to a study by consulting firm Oliver Wyman.
"We expect a stormy 2008," Oliver Wyman said in its State of the Financial Services Industry report.
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"While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting."
Tumbling property prices - especially in the UK and Spain - a weakening dollar, a possible collapse in commodity prices, and a fall in Chinese and Indian stocks will "disrupt" the global economy, the report claimed.
Banks are already coming off one of the worst trading periods in memory, with shares across the industry plummeting 40pc in the past six months.
Oliver Wyman has estimated that financial services companies have already taken a $300bn hit on their sub-prime exposure.
It estimates that $1,300bn worth of sub-prime mortgages were written in total.
US banks will feel the pinch in particular, Oliver Wyman predicts. "North American financial services firms will have a tough year," it said. "Market uncertainty, combined with further write-downs and expected home-price and loan-volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves."
Growth in Western Europe is likely to suffer in 2008, while Latin America has a positive outlook and "growth opportunities exist" in Singapore, Taiwan, Indonesia and Korea, according to the report.
The private equity industry is likely to grow in 2008, the consulting firm said.
Last Updated: 12:37am GMT 26/01/2008
The world's financial institutions will have to write down a further $300bn (£152bn) of US sub-prime losses before the crisis is over, according to a study by consulting firm Oliver Wyman.
"We expect a stormy 2008," Oliver Wyman said in its State of the Financial Services Industry report.
advertisement
"While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting."
Tumbling property prices - especially in the UK and Spain - a weakening dollar, a possible collapse in commodity prices, and a fall in Chinese and Indian stocks will "disrupt" the global economy, the report claimed.
Banks are already coming off one of the worst trading periods in memory, with shares across the industry plummeting 40pc in the past six months.
Oliver Wyman has estimated that financial services companies have already taken a $300bn hit on their sub-prime exposure.
It estimates that $1,300bn worth of sub-prime mortgages were written in total.
US banks will feel the pinch in particular, Oliver Wyman predicts. "North American financial services firms will have a tough year," it said. "Market uncertainty, combined with further write-downs and expected home-price and loan-volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves."
Growth in Western Europe is likely to suffer in 2008, while Latin America has a positive outlook and "growth opportunities exist" in Singapore, Taiwan, Indonesia and Korea, according to the report.
The private equity industry is likely to grow in 2008, the consulting firm said.
Nicely Said.........................
"The only thing necessary for the triumph of evil is that good men force others to be good."-Tom Kane
Nicely Said.........................
"The only thing necessary for the triumph of evil is that good men force others to be good."-Tom Kane
Nicely Said......................
The problem is that after nearly four decades of fiat money, reconnecting Gold to the monetary system would be an act of HUGE political courage. It will be interesting to see which nation takes the plunge, and how much further the situation must deteriorate before it's taken. - Bill Buckler, The Privateer - 26 January 2008
M1 & M2 Money Supply Chart
What about M1 and M2?
by Shelby Moore, January 27, 2008
Most of us analysts correctly predicted that the US Fed would accelerate the growth of M3, in response to a deflating credit bubble. We correctly predicted that gold and silver would benefit. In my current opinion, we were too bullish on mining stocks near-term, because we ignored the definitions of M1 and M2.
Speculation in all things in America has been declining since mid-2006, because M1 has been declining since mid-2006 bounce, both on it's own and even more so if relative to accelerating M3 (divide M1 & M2 by M3 in your mind to get plunging M1 and M2 curves).
Understand from the following definitions of M1, M2, and M3, that Americans for the most part only speculate with M1 and margin credit (with M1 needed to service margin speculation), in large part Americans invest for perceived "safety", the portion of M2 not in M1, and of course Americans have no accounts with access to the portion of M3 not in M2:
http://rs6.net/tn.jsp?e=001t2GoaiZt_ygQtasvdvlJ0XM9yEcoH1LUfcB27ti5NXz25yZ6atKkKaMHJKhmBZ7FO-VxX2VhzcJzHjeqZemMh3ywoum8CQhwp__MAhXfpJAkqYGsYA6BV-BAULq9rDquf1sslQKZ6GpR-XhoBkoP6_9qNi94H47i
Although the US and EU central banks are providing increased liquidity, it is mostly ending up in M3, not in M2 or M1. The fact of many defaults and writedowns is indicative of a deflation of M2 and M1 relative to the long-term buying power of the dollar (long-term buying power driven by M3). So we have a deflation of actual spendable/investable value, simultaneous with an accelerating dilution of the value of the dollar via M3. In short, the government must be the borrower for the people and dole it out via stimulus and government spending, and the largest Fed member banks (the owners of the Fed) are being given liquidity to buy up the distressed assets in the economy for pennies on the dollar. The US government's TBill rates are declining as Fed cuts rates, while Libor and consumer credit rates go higher because private enterprise has declining real M1 and M2. I had described in the past this mechanism of how the masses use of fiat insures an ever increasing socialism, where financial power becomes concentrated:
http://rs6.net/tn.jsp?e=001t2GoaiZt_yizX0uk5eTOAj6BJH5Ey23wVAqDkFbZuEKgQNfCQBaDPdw-6RzmuwDTtFcJzWSVxAHHV1wc0kriuktrTbWHPPbxRdzGp26xUK7Dy_ENRmjnuwWJWEit63LDkKxzG_Q8Ep7oP__J8y7K5l0EtLhhztj_52P3jZAq-c8=
Most of the domestic US economy (M1 and M2) is being deflated. And we are only at the tip of the iceberg of the deflation of the $600 trillion in credit derivatives.
Boomers have (in their ignorance of M3 dilution and real inflation rates) moved their M2 to perceived "safety" of fixed interest (and to a small extent precious metals):
http://rs6.net/tn.jsp?e=001t2GoaiZt_yidGM_qifvNo-krq3C5hLMFupamJE_w3q1b47ciXOvXLJGz2cyi_PMi_wlqUtoWVae2nOa4cElNrp2y14N-PmrcfjP55bwZQFcCYjHxiJekSR8xcjUb8XLZvT_On6PzjkW-i7_bPRfB0SaK0fqazdC8
Because the total value of the precious metals markets are so small relative to the bond markets, it only takes a very miniscule percentage of the M2 moving to true safety, to get the gold and silver price action over the past several months. This is nothing compared to what we will see in gold and silver ongoing, as the public slowly awakens from their ignorance. We are only at the tip of the iceberg.
To get an outlook for mining stocks, I first note that the odds of a small decrease in the rate of growth for the world economy is very probable for 2008. Gary North explains this well, although I think he is a bit too pessimistic on globalization long-term for reasons I will explain:
http://rs6.net/tn.jsp?e=001t2GoaiZt_ygyLP-ijsKgy7tEFIbCZGirTduyLe6Qb6Qlfzql4RGzQNMLvIU7CWAC1Y8oVl_xlcL6EcjWTnOeJj-mN2gTG8lEgkqwXRuSPRnTbyKqG5yS2GEkRptDTxdB5-1HWJQOtkNZ3cSReInCKA==
The declining real rates (even if only accessible to the government and large Fed member banks) means a movement of capital to emerging markets where real returns are still possible:
http://rs6.net/tn.jsp?e=001t2GoaiZt_yjm2gYw6f3JvnO23nmCQo786PtMODTv3Ki23oshjvCN_0__HGO2NCYieu1iTufbaYtw0XUYkk3plL7lTvVYclA51fl0UCGxajbRnTZn25CZq4oa84Sy-QBTPPTswGqjgmDcA2zT3iGRaSCgJmy9Bpag
However, I am pondering that this dollar-carry trade effect will be on a lag, with the near-term 2008 result to be a slight global slowdown-- more severe in the USA. Maund pointed out that gold and silver also become more attractive with declining real interest rates:
http://rs6.net/tn.jsp?e=001t2GoaiZt_yhX8TiLxwQkWFimcjVwj5106S_EkWLN_r6w_hWta2T3IhtpDL7E5qWf3NUVzrghqmkfHDVlgiJ01RyB_i5A0vEkx7BOVMN6KzGVfjzmG30drCuDvz_4GPaMfxFv9ZCed60L2_B6VFSXs1KDw4v0FexZ
Given the relative sizes of the total value of the gold and silver markets, versus the total GDP of emerging nations, I don't have to tell you which has more leverage to declining real interest rates and the awakening from ignorance of the masses as their buying power dries up. Metaphorically, globalization and emerging markets are already more than a sapling oak tree compared to the acorn of the silver market.
So I think this is definitely not the time to buy base metal juniors which have forward p/e ratios which are not that much better than precious metal juniors. Given I am the programmer of Miningpedia.com, I have access to data on 700+ juniors, and I have not found any base metal junior with a lower forward p/e of about 1-- meaning one year's forward production will equal the current fully diluted market cap. Whereas, there are a few precious metal juniors lised at the top of Miningpedia with forward p/e of less than 2.
Due to the money aggregates realities I explained, I see gold and silver continuing to rocket up in 2008. I don't want to project prices, because the situation is an ongoing firecracker that could fathomably send gold north of $1500 and silver north of $30. No one knows, but prices are going up.
Thus at some point, the producing gold and silver miners will start to spend their excess cash flow hoards to acquire near-term gold and silver producers that are extremely undervalued. I think they will buying these for cheap and fast expansion of their production. This will re-ignite the speculation into precious metal juniors. Mainstream investors of major gold producers will take note that their company just bought a junior that they could have bought prior, and greed will return to the precious metals junior market. With base metal juniors, the outlook is more murky for the reasons I enumerated above, so I think "safefy" mentality will override greed for some time.
by Shelby Moore, January 27, 2008
Most of us analysts correctly predicted that the US Fed would accelerate the growth of M3, in response to a deflating credit bubble. We correctly predicted that gold and silver would benefit. In my current opinion, we were too bullish on mining stocks near-term, because we ignored the definitions of M1 and M2.
Speculation in all things in America has been declining since mid-2006, because M1 has been declining since mid-2006 bounce, both on it's own and even more so if relative to accelerating M3 (divide M1 & M2 by M3 in your mind to get plunging M1 and M2 curves).
Understand from the following definitions of M1, M2, and M3, that Americans for the most part only speculate with M1 and margin credit (with M1 needed to service margin speculation), in large part Americans invest for perceived "safety", the portion of M2 not in M1, and of course Americans have no accounts with access to the portion of M3 not in M2:
http://rs6.net/tn.jsp?e=001t2GoaiZt_ygQtasvdvlJ0XM9yEcoH1LUfcB27ti5NXz25yZ6atKkKaMHJKhmBZ7FO-VxX2VhzcJzHjeqZemMh3ywoum8CQhwp__MAhXfpJAkqYGsYA6BV-BAULq9rDquf1sslQKZ6GpR-XhoBkoP6_9qNi94H47i
Although the US and EU central banks are providing increased liquidity, it is mostly ending up in M3, not in M2 or M1. The fact of many defaults and writedowns is indicative of a deflation of M2 and M1 relative to the long-term buying power of the dollar (long-term buying power driven by M3). So we have a deflation of actual spendable/investable value, simultaneous with an accelerating dilution of the value of the dollar via M3. In short, the government must be the borrower for the people and dole it out via stimulus and government spending, and the largest Fed member banks (the owners of the Fed) are being given liquidity to buy up the distressed assets in the economy for pennies on the dollar. The US government's TBill rates are declining as Fed cuts rates, while Libor and consumer credit rates go higher because private enterprise has declining real M1 and M2. I had described in the past this mechanism of how the masses use of fiat insures an ever increasing socialism, where financial power becomes concentrated:
http://rs6.net/tn.jsp?e=001t2GoaiZt_yizX0uk5eTOAj6BJH5Ey23wVAqDkFbZuEKgQNfCQBaDPdw-6RzmuwDTtFcJzWSVxAHHV1wc0kriuktrTbWHPPbxRdzGp26xUK7Dy_ENRmjnuwWJWEit63LDkKxzG_Q8Ep7oP__J8y7K5l0EtLhhztj_52P3jZAq-c8=
Most of the domestic US economy (M1 and M2) is being deflated. And we are only at the tip of the iceberg of the deflation of the $600 trillion in credit derivatives.
Boomers have (in their ignorance of M3 dilution and real inflation rates) moved their M2 to perceived "safety" of fixed interest (and to a small extent precious metals):
http://rs6.net/tn.jsp?e=001t2GoaiZt_yidGM_qifvNo-krq3C5hLMFupamJE_w3q1b47ciXOvXLJGz2cyi_PMi_wlqUtoWVae2nOa4cElNrp2y14N-PmrcfjP55bwZQFcCYjHxiJekSR8xcjUb8XLZvT_On6PzjkW-i7_bPRfB0SaK0fqazdC8
Because the total value of the precious metals markets are so small relative to the bond markets, it only takes a very miniscule percentage of the M2 moving to true safety, to get the gold and silver price action over the past several months. This is nothing compared to what we will see in gold and silver ongoing, as the public slowly awakens from their ignorance. We are only at the tip of the iceberg.
To get an outlook for mining stocks, I first note that the odds of a small decrease in the rate of growth for the world economy is very probable for 2008. Gary North explains this well, although I think he is a bit too pessimistic on globalization long-term for reasons I will explain:
http://rs6.net/tn.jsp?e=001t2GoaiZt_ygyLP-ijsKgy7tEFIbCZGirTduyLe6Qb6Qlfzql4RGzQNMLvIU7CWAC1Y8oVl_xlcL6EcjWTnOeJj-mN2gTG8lEgkqwXRuSPRnTbyKqG5yS2GEkRptDTxdB5-1HWJQOtkNZ3cSReInCKA==
The declining real rates (even if only accessible to the government and large Fed member banks) means a movement of capital to emerging markets where real returns are still possible:
http://rs6.net/tn.jsp?e=001t2GoaiZt_yjm2gYw6f3JvnO23nmCQo786PtMODTv3Ki23oshjvCN_0__HGO2NCYieu1iTufbaYtw0XUYkk3plL7lTvVYclA51fl0UCGxajbRnTZn25CZq4oa84Sy-QBTPPTswGqjgmDcA2zT3iGRaSCgJmy9Bpag
However, I am pondering that this dollar-carry trade effect will be on a lag, with the near-term 2008 result to be a slight global slowdown-- more severe in the USA. Maund pointed out that gold and silver also become more attractive with declining real interest rates:
http://rs6.net/tn.jsp?e=001t2GoaiZt_yhX8TiLxwQkWFimcjVwj5106S_EkWLN_r6w_hWta2T3IhtpDL7E5qWf3NUVzrghqmkfHDVlgiJ01RyB_i5A0vEkx7BOVMN6KzGVfjzmG30drCuDvz_4GPaMfxFv9ZCed60L2_B6VFSXs1KDw4v0FexZ
Given the relative sizes of the total value of the gold and silver markets, versus the total GDP of emerging nations, I don't have to tell you which has more leverage to declining real interest rates and the awakening from ignorance of the masses as their buying power dries up. Metaphorically, globalization and emerging markets are already more than a sapling oak tree compared to the acorn of the silver market.
So I think this is definitely not the time to buy base metal juniors which have forward p/e ratios which are not that much better than precious metal juniors. Given I am the programmer of Miningpedia.com, I have access to data on 700+ juniors, and I have not found any base metal junior with a lower forward p/e of about 1-- meaning one year's forward production will equal the current fully diluted market cap. Whereas, there are a few precious metal juniors lised at the top of Miningpedia with forward p/e of less than 2.
Due to the money aggregates realities I explained, I see gold and silver continuing to rocket up in 2008. I don't want to project prices, because the situation is an ongoing firecracker that could fathomably send gold north of $1500 and silver north of $30. No one knows, but prices are going up.
Thus at some point, the producing gold and silver miners will start to spend their excess cash flow hoards to acquire near-term gold and silver producers that are extremely undervalued. I think they will buying these for cheap and fast expansion of their production. This will re-ignite the speculation into precious metal juniors. Mainstream investors of major gold producers will take note that their company just bought a junior that they could have bought prior, and greed will return to the precious metals junior market. With base metal juniors, the outlook is more murky for the reasons I enumerated above, so I think "safefy" mentality will override greed for some time.
Another Gem By Bill Bonner
Against the Gods By Bill Bonner
What makes the blow up so astonishing is that it is astonishing at all...
An emergency meeting of the U.S. President's "Plunge Protection Team" must have been called Monday night. Any other group of chief executives, colluding to rig prices, would have drawn, say, 5 to 10 with time off for good behavior. But the fix was in. And the Fed announced the new price of credit and waited to see how the rubes would react. In the event...reactions were mixed. Asian stocks rebounded. The Dow ended the day down. Then, the following day...it looked like the fixers might have rearranged the whole deck; rumors of a deal to save Wall Street further losses sent the Dow up more than 300 points.
Thus the long-running spectacle continues. Today, for the benefit of those who haven't been paying attention, we clarify the plot.
The dramatis personae are many. But they fit into two camps. In one is a whole line of Promethean protagonists -- prominent economists and politicians, beginning with Fed chairman Arthur Burns ...followed by the epic hero Alan Greenspan. Currently, the lead is being played by Ben Bernanke, supported by George W. Bush in the White house and colleagues Mervyn King in England and Jean-Claude Trichet at the European Central Bank. In the other camp are, well, the gods.
It's an antique story but the current action began in 1971, when Richard Milhous Nixon snuck in and stole the gods' golden fire. Not surprisingly, the gods were cheesed off. They had put the metal in the ground themselves. And gold's record for maintaining steady prices was second to none. An ounce of gold would buy about as much in 1950 as it would have in 1800...or 1700, when Isaac Newton was Master of the Mint. But modern political economists turned their backs on number 79 on the periodic table. They wanted a different kind of price stability...a stability they could mess with. Henceforth, the Nixon team announced, the world financial system would dispense with gold entirely. They would control the value of money themselves. They no longer needed gold backing them up.
As to this proposition, David Ricardo spoke for the gods:
"Experience shows that neither a State nor a Bank ever had the unrestricted power of issuing paper money, without abusing that power: in all States, therefore, the issue of paper money ought to be under some check and control, none seems so proper for that purpose, as that of subjecting the issues of paper money to the obligation of paying their notes, either in gold coin or bullion."
And thus were the lines drawn. Who would prevail? The gods or The Man? It would be a first for mankind. But in the 190 years since Ricardo wrote, had man evolved into a more perfect being? Given a once-in-a-lifetime opportunity to stiff foreign creditors by printing up dollars at will, would a nation of angels be able to resist?
You may guess the answer, dear reader. But what is extraordinary about this tale is that the telling has taken so long. And then, when it inevitably goes the way it always goes, people are astonished by it!
It looked as though the question would be settled quickly when prices ran wild in the '70s. Inflation in July of '71 was almost the same as it is today – about 4.4%. But then, Richard Nixon judged it such a threat to the nation that he imposed price controls. Still, without gold anchoring the dollar, prices rose. Ten years later, CPI was running over 10%...and gold had soared over $800. The gods were having their fun.
But then, into the Fed stepped a colossus of a man; "Tall Paul" Volcker moved quickly to rescue man's paper money. He tightened lending and pushed up 30-year Treasury yields over 15%. The dollar advanced and the gods retreated. Man was proud again. The drama seemed to be over. The fellows with their feet on the ground had triumphed.
For the next 20 years, crises came and crises went. Each one was dealt with by softening up man's money with more cash and credit. And each one seemed like such a success; man's confidence grew. Consumer price inflation remained low and gold fell. By '99, gold coins were practically the only thing you leave on the seats of your car in Baltimore...confident that no one would bother stealing them. And as recently as this past November, William Poole, president of the Federal Reserve Bank of St. Louis, speaking for the whole race and sounding like Scipio after the destruction of Carthage, announced:
"Macroeconomists today do not believe that policies to stabilize the price level and aggregate economic activity create a hazard... Investors and entrepreneurs have as much incentive as they ever had to manage risk appropriately. What they do not have to deal with it macroeconomic risk of the magnitude experienced all too often in the past."
But this week, the macro-economic risk seemed as great as ever before. What had gone wrong? The gods had set a trap. Between the Nixon and the Bush II administrations, low rates of consumer price inflation caused our heroes to err. With the quality of their money in no apparent danger, they allowed themselves to print more and more of it. Money was available to anyone who asked for it. For 25 years, the cost of credit fell...leading Americans to borrow and spend ...until they had borrowed and spent too much. And after the limp recession of 2001-2002, the quantity of paper money increased even faster – three or four times faster than GDP. Fancy new instruments – ARMs, SIVs, CDOs, Swaps and MBSs – gave him even more rope. And then, the gods roared with laughter.
Gold shot up to three times its price in 1999. Oil reached $100 a barrel. Housing markets wobbled...credit markets crunched...and then stocks fell.
And now Mr. Bernanke has panicked. He offers even more money and credit to a world that already has too much. Of course, we don't know how the contest will turn out, but we bet on the gods.
What makes the blow up so astonishing is that it is astonishing at all...
An emergency meeting of the U.S. President's "Plunge Protection Team" must have been called Monday night. Any other group of chief executives, colluding to rig prices, would have drawn, say, 5 to 10 with time off for good behavior. But the fix was in. And the Fed announced the new price of credit and waited to see how the rubes would react. In the event...reactions were mixed. Asian stocks rebounded. The Dow ended the day down. Then, the following day...it looked like the fixers might have rearranged the whole deck; rumors of a deal to save Wall Street further losses sent the Dow up more than 300 points.
Thus the long-running spectacle continues. Today, for the benefit of those who haven't been paying attention, we clarify the plot.
The dramatis personae are many. But they fit into two camps. In one is a whole line of Promethean protagonists -- prominent economists and politicians, beginning with Fed chairman Arthur Burns ...followed by the epic hero Alan Greenspan. Currently, the lead is being played by Ben Bernanke, supported by George W. Bush in the White house and colleagues Mervyn King in England and Jean-Claude Trichet at the European Central Bank. In the other camp are, well, the gods.
It's an antique story but the current action began in 1971, when Richard Milhous Nixon snuck in and stole the gods' golden fire. Not surprisingly, the gods were cheesed off. They had put the metal in the ground themselves. And gold's record for maintaining steady prices was second to none. An ounce of gold would buy about as much in 1950 as it would have in 1800...or 1700, when Isaac Newton was Master of the Mint. But modern political economists turned their backs on number 79 on the periodic table. They wanted a different kind of price stability...a stability they could mess with. Henceforth, the Nixon team announced, the world financial system would dispense with gold entirely. They would control the value of money themselves. They no longer needed gold backing them up.
As to this proposition, David Ricardo spoke for the gods:
"Experience shows that neither a State nor a Bank ever had the unrestricted power of issuing paper money, without abusing that power: in all States, therefore, the issue of paper money ought to be under some check and control, none seems so proper for that purpose, as that of subjecting the issues of paper money to the obligation of paying their notes, either in gold coin or bullion."
And thus were the lines drawn. Who would prevail? The gods or The Man? It would be a first for mankind. But in the 190 years since Ricardo wrote, had man evolved into a more perfect being? Given a once-in-a-lifetime opportunity to stiff foreign creditors by printing up dollars at will, would a nation of angels be able to resist?
You may guess the answer, dear reader. But what is extraordinary about this tale is that the telling has taken so long. And then, when it inevitably goes the way it always goes, people are astonished by it!
It looked as though the question would be settled quickly when prices ran wild in the '70s. Inflation in July of '71 was almost the same as it is today – about 4.4%. But then, Richard Nixon judged it such a threat to the nation that he imposed price controls. Still, without gold anchoring the dollar, prices rose. Ten years later, CPI was running over 10%...and gold had soared over $800. The gods were having their fun.
But then, into the Fed stepped a colossus of a man; "Tall Paul" Volcker moved quickly to rescue man's paper money. He tightened lending and pushed up 30-year Treasury yields over 15%. The dollar advanced and the gods retreated. Man was proud again. The drama seemed to be over. The fellows with their feet on the ground had triumphed.
For the next 20 years, crises came and crises went. Each one was dealt with by softening up man's money with more cash and credit. And each one seemed like such a success; man's confidence grew. Consumer price inflation remained low and gold fell. By '99, gold coins were practically the only thing you leave on the seats of your car in Baltimore...confident that no one would bother stealing them. And as recently as this past November, William Poole, president of the Federal Reserve Bank of St. Louis, speaking for the whole race and sounding like Scipio after the destruction of Carthage, announced:
"Macroeconomists today do not believe that policies to stabilize the price level and aggregate economic activity create a hazard... Investors and entrepreneurs have as much incentive as they ever had to manage risk appropriately. What they do not have to deal with it macroeconomic risk of the magnitude experienced all too often in the past."
But this week, the macro-economic risk seemed as great as ever before. What had gone wrong? The gods had set a trap. Between the Nixon and the Bush II administrations, low rates of consumer price inflation caused our heroes to err. With the quality of their money in no apparent danger, they allowed themselves to print more and more of it. Money was available to anyone who asked for it. For 25 years, the cost of credit fell...leading Americans to borrow and spend ...until they had borrowed and spent too much. And after the limp recession of 2001-2002, the quantity of paper money increased even faster – three or four times faster than GDP. Fancy new instruments – ARMs, SIVs, CDOs, Swaps and MBSs – gave him even more rope. And then, the gods roared with laughter.
Gold shot up to three times its price in 1999. Oil reached $100 a barrel. Housing markets wobbled...credit markets crunched...and then stocks fell.
And now Mr. Bernanke has panicked. He offers even more money and credit to a world that already has too much. Of course, we don't know how the contest will turn out, but we bet on the gods.
Morocco As An Investment Opportunity
From Sun to Fog: Investment Opportunities in Morocco
Can Morocco see its way to the global investment stage despite its foggy economy?
by Sara Nunnally, Editor, Taipan Trader
Even though my flight from Madrid to Casablanca took less than two hours, I feel like I’m worlds away.
In a most appropriate analogy, the weather has taken a decidedly foggy turn as the afternoon has worn on. I guess I left the sun in Spain.
Madrid is a lively, vibrant city with bars and restaurants filled to the brim. Even during siesta, when many shops close down, there are people everywhere walking with bags in hand, hanging out at various plazas, chatting on cellphones.
(On a financial note, I spoke with one company that has totally insulated itself against the U.S. subprime crisis. I’m in the middle of writing up a full report for Taipan Trader subscribers. Be on the lookout for when that’ll be available.)
Casablanca (so far, which is to say from the airport to the train station to the hotel) is bustling for sure, but it’s mostly young male taxi drivers looking for their next fare.
The fog has rolled in…
I don’t quite know what to expect from Casablanca. The train into town was filled with three or four languages slung around casually with an abundance of hand gestures that help Westerners get the gist of the conversation.
I speak a little Spanish, a smattering of French (I can ask if you speak English), and how to say “thank you” and “please” in Arabic. So listening to conversations was a bit like listening underwater, where you can catch a few worlds here and there, and some words sound like you should know the meanings but don’t.
It is very surprising how friendly -- nearly aggressively so -- people are.
A young Moroccan woman named Laila approached me at the train station and we struck up a conversation mostly in Spanish (her husband was Spanish and she was traveling back to Morocco for her cousin’s wedding).
It was plainly obvious that neither of us understood completely what the other was saying. Luckily, a gentleman in our seating area spoke a little English. Soon we were translating back and forth using English, Arabic, Spanish and French.
Incidentally, the gentleman was a Berber -- an original Moroccan. Medieval Europe called them the Moors. There are nearly 19 million Berbers in Morocco. His name was Mbark and he was a student studying information technology at a local college.
Laila was wearing a necklace with a Berber symbol, which caused a lively discussion with a local Arab woman that quickly turned to Moroccan politics, and then to global politics.
Since the word “American” is “American” (in some form or other) in Spanish, French and Arabic, it was easy to tell when talk turned to President Bush and the West’s political philosophies.
And if I didn’t understand the words, the gestures and expressions were certainly clear enough…
The West interferes.
This is mainly true with the French, according to Laila. She said that our people generally like her people, and that her people generally like our people… “Pero los Franceses, no,” she said.
France, which has lucrative energy contracts with Algeria and Egypt and is the No. 1 trading partner with Morocco, has been moving a lot of cash into all of Northern Africa. And with a history of immigrant unrest in Paris (like the riots right around France’s presidential elections), it’s easy to see a tug-of-war is going on with national resource interests and the need for economic reforms… and, thus, with the hearts and minds of all the citizens in the Maghreb region.
This is obvious with the mixture of Western and traditional dress.
How does a country balance its need for a sustainable future with the desire to hold onto tradition and culture? Does one inhibit or suppress the other?
How can a market, whose first instinct is to invite you in for a cup of hot mint tea while you barter, keep up with the whiplash of global investing?
There isn’t a simple answer, but national economists agree on one thing: reform needs to come quicker.
About 8.6% of Morocco’s citizens have jumped ship and landed in places like France and Spain. But even more startling is that more than 10% of tertiary-educated (above secondary school) Moroccans leave the country.
Those folks send about 5.7 billion euros in remittances back to Morocco. That’s about 10% of the country’s GDP.
In their place come immigrants from other countries, poorer countries.
As a result, 19% of the country’s population lives below the poverty line, and 20% of urban populations are unemployed. In order to reinvigorate the economy, Morocco has instituted a number of economic reforms, such as the privatization of nationalized businesses and the liberalization of certain sectors like oil and gas and telecommunications, but there’s a lot of work to be done if Morocco wants to see eye to eye with EU members.
The bright side is that Morocco has seen an influx of foreign capital recently. Real estate has been growing strongly, as well as services and tourism. In fact, Fox Business News recently voted Morocco as the second-most desirable place to go when the dollar’s falling.
But that’s not all.
With Casablanca’s stock market valued at $77 billion and growing, and with closer and closer ties with the European Union, Morocco might just be prepared to push forward on the economic front.
(By the way, I’ll be visiting the Casablanca Stock Exchange on Tuesday for an exclusive tour. More on that later in the week.)
Whether or not it will happen fast enough to stymie the “Moroccan Diaspora” is a question that will take decades to answer.
One thing’s for sure, though: The mix of saffron-spiced tradition and silver-gilded economic promises make for an interesting brew; one worth exploring in the future.
Even though my flight from Madrid to Casablanca took less than two hours, I feel like I’m worlds away.
In a most appropriate analogy, the weather has taken a decidedly foggy turn as the afternoon has worn on. I guess I left the sun in Spain.
Madrid is a lively, vibrant city with bars and restaurants filled to the brim. Even during siesta, when many shops close down, there are people everywhere walking with bags in hand, hanging out at various plazas, chatting on cellphones.
(On a financial note, I spoke with one company that has totally insulated itself against the U.S. subprime crisis. I’m in the middle of writing up a full report for Taipan Trader subscribers. Be on the lookout for when that’ll be available.)
Casablanca (so far, which is to say from the airport to the train station to the hotel) is bustling for sure, but it’s mostly young male taxi drivers looking for their next fare.
The fog has rolled in…
I don’t quite know what to expect from Casablanca. The train into town was filled with three or four languages slung around casually with an abundance of hand gestures that help Westerners get the gist of the conversation.
I speak a little Spanish, a smattering of French (I can ask if you speak English), and how to say “thank you” and “please” in Arabic. So listening to conversations was a bit like listening underwater, where you can catch a few worlds here and there, and some words sound like you should know the meanings but don’t.
It is very surprising how friendly -- nearly aggressively so -- people are.
A young Moroccan woman named Laila approached me at the train station and we struck up a conversation mostly in Spanish (her husband was Spanish and she was traveling back to Morocco for her cousin’s wedding).
It was plainly obvious that neither of us understood completely what the other was saying. Luckily, a gentleman in our seating area spoke a little English. Soon we were translating back and forth using English, Arabic, Spanish and French.
Incidentally, the gentleman was a Berber -- an original Moroccan. Medieval Europe called them the Moors. There are nearly 19 million Berbers in Morocco. His name was Mbark and he was a student studying information technology at a local college.
Laila was wearing a necklace with a Berber symbol, which caused a lively discussion with a local Arab woman that quickly turned to Moroccan politics, and then to global politics.
Since the word “American” is “American” (in some form or other) in Spanish, French and Arabic, it was easy to tell when talk turned to President Bush and the West’s political philosophies.
And if I didn’t understand the words, the gestures and expressions were certainly clear enough…
The West interferes.
This is mainly true with the French, according to Laila. She said that our people generally like her people, and that her people generally like our people… “Pero los Franceses, no,” she said.
France, which has lucrative energy contracts with Algeria and Egypt and is the No. 1 trading partner with Morocco, has been moving a lot of cash into all of Northern Africa. And with a history of immigrant unrest in Paris (like the riots right around France’s presidential elections), it’s easy to see a tug-of-war is going on with national resource interests and the need for economic reforms… and, thus, with the hearts and minds of all the citizens in the Maghreb region.
This is obvious with the mixture of Western and traditional dress.
How does a country balance its need for a sustainable future with the desire to hold onto tradition and culture? Does one inhibit or suppress the other?
How can a market, whose first instinct is to invite you in for a cup of hot mint tea while you barter, keep up with the whiplash of global investing?
There isn’t a simple answer, but national economists agree on one thing: reform needs to come quicker.
About 8.6% of Morocco’s citizens have jumped ship and landed in places like France and Spain. But even more startling is that more than 10% of tertiary-educated (above secondary school) Moroccans leave the country.
Those folks send about 5.7 billion euros in remittances back to Morocco. That’s about 10% of the country’s GDP.
In their place come immigrants from other countries, poorer countries.
As a result, 19% of the country’s population lives below the poverty line, and 20% of urban populations are unemployed. In order to reinvigorate the economy, Morocco has instituted a number of economic reforms, such as the privatization of nationalized businesses and the liberalization of certain sectors like oil and gas and telecommunications, but there’s a lot of work to be done if Morocco wants to see eye to eye with EU members.
The bright side is that Morocco has seen an influx of foreign capital recently. Real estate has been growing strongly, as well as services and tourism. In fact, Fox Business News recently voted Morocco as the second-most desirable place to go when the dollar’s falling.
But that’s not all.
With Casablanca’s stock market valued at $77 billion and growing, and with closer and closer ties with the European Union, Morocco might just be prepared to push forward on the economic front.
(By the way, I’ll be visiting the Casablanca Stock Exchange on Tuesday for an exclusive tour. More on that later in the week.)
Whether or not it will happen fast enough to stymie the “Moroccan Diaspora” is a question that will take decades to answer.
One thing’s for sure, though: The mix of saffron-spiced tradition and silver-gilded economic promises make for an interesting brew; one worth exploring in the future.
Somebody Is Doing Well These Days
The Big Winners from the Worst Market Crisis in 60 Years
Today's comment is by Mike Burnick, Senior Editor and Global Markets Analyst.Dear A-Letter Reader, There was a great article in the Financial Times the other day that I want to point out to you, because it's well worth your time to read - especially considering the source: George Soros.For those who may not be familiar with the name, George Soros is one of the few "living legends" in the pantheon of world's great investors...who actually deserves the title. Along with Jim Rogers, Soros co-founded what's perhaps the most famous hedge fund of all time, the Quantum Fund. Over a period of more than 30 years, Quantum returned an astounding return of more than 30% per year. If you placed US$100,000 in the care of Soros and Rogers at the beginning in 1969, you would have made about US$400 million profit by the year 2000! Now that's the magic of compounding at work!
Soros' Views Worth Listening To
In this day and age, it's very difficult to identify one out of the thousands of hedge funds that can actually match, much less beat, the S&P 500 Index on a consistent basis. That's why Soros' achievement with the Quantum fund is so remarkable.There are only a few investment legends who are worth listening to. Soros is one of these. Unfortunately, Soros has largely moved away from active investing on a daily basis. He chooses to focus instead on his philanthropic endeavors, and considering the investment returns he generated—why not!That's why I took notice when I saw the name George Soros in the byline of an article he penned for the Financial Times. The subject: What else but the global credit crunch?
Credit Super-Boom Goes Bust
Today's comment is by Mike Burnick, Senior Editor and Global Markets Analyst.Dear A-Letter Reader, There was a great article in the Financial Times the other day that I want to point out to you, because it's well worth your time to read - especially considering the source: George Soros.For those who may not be familiar with the name, George Soros is one of the few "living legends" in the pantheon of world's great investors...who actually deserves the title. Along with Jim Rogers, Soros co-founded what's perhaps the most famous hedge fund of all time, the Quantum Fund. Over a period of more than 30 years, Quantum returned an astounding return of more than 30% per year. If you placed US$100,000 in the care of Soros and Rogers at the beginning in 1969, you would have made about US$400 million profit by the year 2000! Now that's the magic of compounding at work!
Soros' Views Worth Listening To
In this day and age, it's very difficult to identify one out of the thousands of hedge funds that can actually match, much less beat, the S&P 500 Index on a consistent basis. That's why Soros' achievement with the Quantum fund is so remarkable.There are only a few investment legends who are worth listening to. Soros is one of these. Unfortunately, Soros has largely moved away from active investing on a daily basis. He chooses to focus instead on his philanthropic endeavors, and considering the investment returns he generated—why not!That's why I took notice when I saw the name George Soros in the byline of an article he penned for the Financial Times. The subject: What else but the global credit crunch?
Credit Super-Boom Goes Bust
According to Soros, the current financial crisis, precipitated by the U.S. housing market bubble, "is the result of a "super-boom" in easy credit that has gone on pretty much since the end of WWII. Whenever financial markets ran into trouble, "the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy." Of course this created a dangerous "moral hazard." Investors grew comfortable with the fact that the Fed and other central banks were always there to "bailout" their risky investments. Naturally, this only encouraged even greater credit expansion. And of course, Wall Street helped grease the skids, aided by reduced market regulation. In fact, the financial sector "encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared."
The Fox Ends Up Managing the Financial Hen House
Where things got out of hand, according to Soros, was when the unregulated Shadow Banking System (as Bill Gross calls it) began creating new products (derivatives, collateralized debt obligations, and other dangerous three letter acronyms) that nobody could understand. "New products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility." What's that old saying about the Fox guarding the hen house?Or course, the blow-up was inevitable sooner or later. The housing market bust was merely a convenient catalyst. It was the wrong "bust" at the right time. In its aftermath, Soros sees a "period of contraction" in the credit super-boom. That's because "the ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves."
Can the Fed Stimulate its Way Out of This Credit Crunch?
Soros warns that because of the dollar's weakness and inflation in commodity prices, the Fed may no longer be in a position to pump more hot air into the credit bubble by aggressively cutting rates. "If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield," Soros cautions. When this point is reached, "the ability of the Fed to stimulate the economy comes to an end."That's when the whole debt-laden financial house of cards comes crashing down - derivatives and all! This sounds a lot like the doomsday scenario that we have been warning Sovereign Society members about for some time now. I'm happy to see that George Soros has come around to our point of view!Still, there is a big silver lining in this doom and gloom scenario, according to Soros. A recession in the U.S. and the rest of the developed world may be "inevitable" but Soros believes "China, India and some of the oil-producing countries are in a very strong countertrend."In fact, Soros sees a significant shift of power and influence away from the U.S. in particular - and the rest of the developed world (Europe, Japan, etc.) in general. Likewise, he's expecting this shift to favor emerging markets in the developing world, particularly China.
Global Decoupling: Economic Reality or Busted Myth?Asian stocks of course have been plunging the past few months, right along with the U.S. and most other markets around the world. So much for "decoupling" say the critics. But decoupling was never meant to explain short-term investment returns, where manic-depressive investor sentiment always rules over fundamentals. Instead, decoupling is the notion that emerging markets have grown up, and are now capable of standing (and running) in their own right - perhaps even without the support of the American consumer. The long-term fundamentals case for emerging markets remains intact, and the long-term growth potential is head-and-shoulders above the United States. There is growing evidence that shows economic decoupling is in fact taking place. For example, the financial press is abuzz about the apparent collapse in U.S. consumer spending after dismal December retail sales were reported. However, data on U.S. personal consumption expenditures (that's Fed speak for consumer spending) shows a peak way back in 2004. Since then, yearly growth in consumption spending has declined by one-third. Meanwhile, emerging market capital spending has surged to new highs over this same period. Emerging market exports are booming too, growing about 12% annually last year. Since 2000 in fact, emerging market exports have been growing twice as fast as exports from developed countries: 10.8% a year compared to just 5.1%.
A "Radical Realignment" in Favor of Emerging Markets
So if U.S. consumer spending is still the engine of global growth and has been slowing for several years, how is it that emerging market industrial production and exports are still booming? The answer is increased trade between emerging markets that's taking up the slack for slowing U.S. demand, and this dynamic should only get stronger going forward. This is one strong piece of evidence that decoupling isn't dead yet. Still, only time will tell for sure. However, I think it's a mistake to so quickly pronounce decoupling dead, until all the evidence is in. Just because stock markets in China, Brazil and other emerging markets sold-off with virtually every other market around the globe - this doesn't disprove decoupling. Instead, this is what happens in the panic of a bear-market - all stocks go down together - the good, the bad, everything gets ugly. Putting aside recent short-term market volatility, over the long-run, emerging markets are turning the tables on the developed world and have much greater growth potential. As Soros writes... "The current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the U.S. and the rise of China and other countries in the developing world." Now you're playing my tune by George!
The Fox Ends Up Managing the Financial Hen House
Where things got out of hand, according to Soros, was when the unregulated Shadow Banking System (as Bill Gross calls it) began creating new products (derivatives, collateralized debt obligations, and other dangerous three letter acronyms) that nobody could understand. "New products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility." What's that old saying about the Fox guarding the hen house?Or course, the blow-up was inevitable sooner or later. The housing market bust was merely a convenient catalyst. It was the wrong "bust" at the right time. In its aftermath, Soros sees a "period of contraction" in the credit super-boom. That's because "the ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves."
Can the Fed Stimulate its Way Out of This Credit Crunch?
Soros warns that because of the dollar's weakness and inflation in commodity prices, the Fed may no longer be in a position to pump more hot air into the credit bubble by aggressively cutting rates. "If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield," Soros cautions. When this point is reached, "the ability of the Fed to stimulate the economy comes to an end."That's when the whole debt-laden financial house of cards comes crashing down - derivatives and all! This sounds a lot like the doomsday scenario that we have been warning Sovereign Society members about for some time now. I'm happy to see that George Soros has come around to our point of view!Still, there is a big silver lining in this doom and gloom scenario, according to Soros. A recession in the U.S. and the rest of the developed world may be "inevitable" but Soros believes "China, India and some of the oil-producing countries are in a very strong countertrend."In fact, Soros sees a significant shift of power and influence away from the U.S. in particular - and the rest of the developed world (Europe, Japan, etc.) in general. Likewise, he's expecting this shift to favor emerging markets in the developing world, particularly China.
Global Decoupling: Economic Reality or Busted Myth?Asian stocks of course have been plunging the past few months, right along with the U.S. and most other markets around the world. So much for "decoupling" say the critics. But decoupling was never meant to explain short-term investment returns, where manic-depressive investor sentiment always rules over fundamentals. Instead, decoupling is the notion that emerging markets have grown up, and are now capable of standing (and running) in their own right - perhaps even without the support of the American consumer. The long-term fundamentals case for emerging markets remains intact, and the long-term growth potential is head-and-shoulders above the United States. There is growing evidence that shows economic decoupling is in fact taking place. For example, the financial press is abuzz about the apparent collapse in U.S. consumer spending after dismal December retail sales were reported. However, data on U.S. personal consumption expenditures (that's Fed speak for consumer spending) shows a peak way back in 2004. Since then, yearly growth in consumption spending has declined by one-third. Meanwhile, emerging market capital spending has surged to new highs over this same period. Emerging market exports are booming too, growing about 12% annually last year. Since 2000 in fact, emerging market exports have been growing twice as fast as exports from developed countries: 10.8% a year compared to just 5.1%.
A "Radical Realignment" in Favor of Emerging Markets
So if U.S. consumer spending is still the engine of global growth and has been slowing for several years, how is it that emerging market industrial production and exports are still booming? The answer is increased trade between emerging markets that's taking up the slack for slowing U.S. demand, and this dynamic should only get stronger going forward. This is one strong piece of evidence that decoupling isn't dead yet. Still, only time will tell for sure. However, I think it's a mistake to so quickly pronounce decoupling dead, until all the evidence is in. Just because stock markets in China, Brazil and other emerging markets sold-off with virtually every other market around the globe - this doesn't disprove decoupling. Instead, this is what happens in the panic of a bear-market - all stocks go down together - the good, the bad, everything gets ugly. Putting aside recent short-term market volatility, over the long-run, emerging markets are turning the tables on the developed world and have much greater growth potential. As Soros writes... "The current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the U.S. and the rise of China and other countries in the developing world." Now you're playing my tune by George!
SWF's ~ The Bad Kind
Sovereign Wealth Funds - The New Superpower?
Until now, the United States has been the biggest force in the global markets. The U.S. has held this title since U.S. dollar became the world's reserve currency. However, a day is coming when this all may change. So what country will take its place? Who says it has to be a country? Actually, it could be just a sovereign wealth fund owned by a country or several countries. A few nations could literally "join forces" (pool their funds) together to knock the U.S. off its pedestal and become the next "superpower." Check out the comments from Morgan Stanley:Sovereign wealth fund assets may more than quadruple in value by 2015 to US$12 trillion - equal to the current capitalization of the Standard & Poor's 500 Index - from about US$2.5 trillion now, according to Morgan Stanley. It predicts the funds will have assets of US$28 trillion by 2022, more than double the size of the U.S. economy. So if these funds end up becoming TWICE the size of the United States, then the U.S. may lose their dominant influence that it's had throughout the world. Abu Dhabi seems to have more in assets than the next three biggest combined. However, Norway, Singapore and Saudi Arabia all supposedly have over US$300 billion to their name. Abu Dhabi supposedly has US$1.3 Trillion in assets. Kuwait and China supposedly have at least US$250 billion in their Sovereign Wealth Funds. So you can see that if a few "funds" aligned themselves, they could easily become the newest "superpower" of the 21st century very quickly.As you can imagine, most of these countries have built up their "war chest" through selling their countries resources - especially oil. Now they are diversifying these profits away from oil so that it brings even more stability to their economies. I really can't blame them. It's like Warren Buffett diversifying profits away from the textile industry when he took over Berkshire Hathaway and went into other industries. Textiles eventually went out of favor, yet Buffett still had a war chest because he took those profits and reinvested them elsewhere. This is what these funds are doing. That way, if there came a day where oil ran out or demand shifted away to alternative energy sources, then they'd still survive just fine. Obviously, that would be a long time away but countries can't readjust on a dime, they have to plan accordingly many, many years in advance for major adjustments like that. So watch what these new 800 pound gorillas do and where they invest. We should know more about them as time goes on. Even as of this writing, Washington is putting more pressure on nations to lay their cards on the table. U.S. politicians want these nations to be more transparent about their intentions and objectives to invest in American companies. This will be a new trend to keep an eye on for sure.
Until now, the United States has been the biggest force in the global markets. The U.S. has held this title since U.S. dollar became the world's reserve currency. However, a day is coming when this all may change. So what country will take its place? Who says it has to be a country? Actually, it could be just a sovereign wealth fund owned by a country or several countries. A few nations could literally "join forces" (pool their funds) together to knock the U.S. off its pedestal and become the next "superpower." Check out the comments from Morgan Stanley:Sovereign wealth fund assets may more than quadruple in value by 2015 to US$12 trillion - equal to the current capitalization of the Standard & Poor's 500 Index - from about US$2.5 trillion now, according to Morgan Stanley. It predicts the funds will have assets of US$28 trillion by 2022, more than double the size of the U.S. economy. So if these funds end up becoming TWICE the size of the United States, then the U.S. may lose their dominant influence that it's had throughout the world. Abu Dhabi seems to have more in assets than the next three biggest combined. However, Norway, Singapore and Saudi Arabia all supposedly have over US$300 billion to their name. Abu Dhabi supposedly has US$1.3 Trillion in assets. Kuwait and China supposedly have at least US$250 billion in their Sovereign Wealth Funds. So you can see that if a few "funds" aligned themselves, they could easily become the newest "superpower" of the 21st century very quickly.As you can imagine, most of these countries have built up their "war chest" through selling their countries resources - especially oil. Now they are diversifying these profits away from oil so that it brings even more stability to their economies. I really can't blame them. It's like Warren Buffett diversifying profits away from the textile industry when he took over Berkshire Hathaway and went into other industries. Textiles eventually went out of favor, yet Buffett still had a war chest because he took those profits and reinvested them elsewhere. This is what these funds are doing. That way, if there came a day where oil ran out or demand shifted away to alternative energy sources, then they'd still survive just fine. Obviously, that would be a long time away but countries can't readjust on a dime, they have to plan accordingly many, many years in advance for major adjustments like that. So watch what these new 800 pound gorillas do and where they invest. We should know more about them as time goes on. Even as of this writing, Washington is putting more pressure on nations to lay their cards on the table. U.S. politicians want these nations to be more transparent about their intentions and objectives to invest in American companies. This will be a new trend to keep an eye on for sure.
Lucky Irish Charms
Luck o' the Irish: They Get to Legally Avoid Taxes!
Unlike most other nations (including Canada, the United Kingdom and Ireland), the United States taxes all U.S. citizens and resident aliens, even if these persons choose to live outside United States.In stark contrast, Ireland chose the corporate low-tax route years ago. As a result, Ireland has become the prosperity powerhouse of Europe. Businesses and workers from all over Europe flocked to Ireland as new jobs expanded under business taxes ranging from 10% to a maximum of 25%, with a standard rate of 12.5% for most. Many Irish citizens who left in the dismal days of recession and depression have returned to Ireland for these new developments.Ireland taxing an individual's income is what liberal politicians like to call "progressive." The higher the income, the higher the rate of tax payable. In Ireland, the tax rates for an individual in 2007 were between 20% and 41%. But in order to be considered a resident for tax purposes, one of two tests must apply. You have to maintain residency of more than 183 days a year in Ireland or residency of more than 280 days over a period of two years.The latest figures from Ireland Revenue show that some few of 4.3 million Irishmen, including those of great wealth, have chosen to base themselves abroad. They choose to pay lower taxes in low-tax destinations across the globe. Although Ireland's tax rates are relatively low by global standards, an increasing number of high-net-worth individuals are deciding to leave the country of their birth and move to places with lower income tax and no capital gains taxes.New figures prepared by the Revenue Commissioners show there are 19 high net worth individuals who are Irish domiciled, but who are legally non-residents for tax purposes. The figures includes individuals whose net worth (assets less liabilities) exceeds €50 million (US$72.3 million). There are estimated to be more than 250 people on the high net worth list.Nineteen out of 250 people isn't many but it includes most of Ireland's extra-super wealthy. Of the top 20 individuals on the Irish Rich List, at least half are tax residents outside Ireland. Ireland now has more than 3,000 tax exiles who claim non-residency. Many of these individuals are not in the top 250, but they do have serious wealth.Irish Revenue routinely visits the Irish homes of tax exiles to check if they are in the jurisdiction. They also monitor flights by private jets into Dublin and Shannon to ensure that records are correct. Tax exiles must keep flight logs and a detailed diary of their location 365 days of the year. A 2002 law states that an Irish person has to be a non-resident for five years before they can escape paying capital gains tax on the sale of a company or an asset. A person must now be a non-resident for three successive years before they can be regarded as a non-taxable citizen for the purposes of income tax.Most Irish tax exiles live in tax havens such as Switzerland, Monaco, Liechtenstein, Bermuda, the Cayman Islands, the British Virgin Islands and Andorra.
Unlike most other nations (including Canada, the United Kingdom and Ireland), the United States taxes all U.S. citizens and resident aliens, even if these persons choose to live outside United States.In stark contrast, Ireland chose the corporate low-tax route years ago. As a result, Ireland has become the prosperity powerhouse of Europe. Businesses and workers from all over Europe flocked to Ireland as new jobs expanded under business taxes ranging from 10% to a maximum of 25%, with a standard rate of 12.5% for most. Many Irish citizens who left in the dismal days of recession and depression have returned to Ireland for these new developments.Ireland taxing an individual's income is what liberal politicians like to call "progressive." The higher the income, the higher the rate of tax payable. In Ireland, the tax rates for an individual in 2007 were between 20% and 41%. But in order to be considered a resident for tax purposes, one of two tests must apply. You have to maintain residency of more than 183 days a year in Ireland or residency of more than 280 days over a period of two years.The latest figures from Ireland Revenue show that some few of 4.3 million Irishmen, including those of great wealth, have chosen to base themselves abroad. They choose to pay lower taxes in low-tax destinations across the globe. Although Ireland's tax rates are relatively low by global standards, an increasing number of high-net-worth individuals are deciding to leave the country of their birth and move to places with lower income tax and no capital gains taxes.New figures prepared by the Revenue Commissioners show there are 19 high net worth individuals who are Irish domiciled, but who are legally non-residents for tax purposes. The figures includes individuals whose net worth (assets less liabilities) exceeds €50 million (US$72.3 million). There are estimated to be more than 250 people on the high net worth list.Nineteen out of 250 people isn't many but it includes most of Ireland's extra-super wealthy. Of the top 20 individuals on the Irish Rich List, at least half are tax residents outside Ireland. Ireland now has more than 3,000 tax exiles who claim non-residency. Many of these individuals are not in the top 250, but they do have serious wealth.Irish Revenue routinely visits the Irish homes of tax exiles to check if they are in the jurisdiction. They also monitor flights by private jets into Dublin and Shannon to ensure that records are correct. Tax exiles must keep flight logs and a detailed diary of their location 365 days of the year. A 2002 law states that an Irish person has to be a non-resident for five years before they can escape paying capital gains tax on the sale of a company or an asset. A person must now be a non-resident for three successive years before they can be regarded as a non-taxable citizen for the purposes of income tax.Most Irish tax exiles live in tax havens such as Switzerland, Monaco, Liechtenstein, Bermuda, the Cayman Islands, the British Virgin Islands and Andorra.
Rogue Trader My Ass
Hey, did you see that 31-year old Societe General trader Jerome Kerviel lost his French bank $8 billion on stock futures trades gone wrong? Wall Street likes to call these incidents "rogue trading," as if it perpetrated by renegade madmen, pursing their own nefarious agendas.
Please…The real rogues are in the corner offices.
What about rogue CEO Stan O'Neal who made a market call on subprime mortgages and cost his shareholders billions of dollars in equity and losses? Kerviel didn't even personally profit from his trades, according to wire service reports. He was either a bad trader, or one who thought he knew how to make the bank some extra money. "Better to ask forgiveness than permission," goes the old saying. If he had been right, he would probably have been given a raise and several billion euros of the bank's money to play with.
By contrast, guys like Stan O'Neal and Chuck Prince at Citigroup made strategic decisions to immerse their company's balance sheets in risky financial products at the height of a credit bubble. They shifted operational focus, dedicated company resources, and committed their companies' non-risk capital to extreme risk. Oops! O'Neal and Prince lost their big bets. But they hardly walked away as losers. O'Neal cashed about US$161 million worth of severance checks after leading Merrill Lynch to its largest loss in the firm's 93-year history. Prince received a $40 million farewell package from Citigroup. Kerviel will likely receive a jail sentence. Something is very wrong here.
Let's not blame the rogue traders or the hedge funds for the mess we're in, dear investor. Let's blame the rogue capitalists – the people who've turned financial companies into vehicles for funneling shareholder capital directly into their own pockets. These titans of the banking world were supposed to be the men and women that made Britain and America the best "allocators of capital" in the world.
Little did we know that these folks would excel at allocating your capital into their pockets…and would put the entire Western financial system at risk in the process.
Please…The real rogues are in the corner offices.
What about rogue CEO Stan O'Neal who made a market call on subprime mortgages and cost his shareholders billions of dollars in equity and losses? Kerviel didn't even personally profit from his trades, according to wire service reports. He was either a bad trader, or one who thought he knew how to make the bank some extra money. "Better to ask forgiveness than permission," goes the old saying. If he had been right, he would probably have been given a raise and several billion euros of the bank's money to play with.
By contrast, guys like Stan O'Neal and Chuck Prince at Citigroup made strategic decisions to immerse their company's balance sheets in risky financial products at the height of a credit bubble. They shifted operational focus, dedicated company resources, and committed their companies' non-risk capital to extreme risk. Oops! O'Neal and Prince lost their big bets. But they hardly walked away as losers. O'Neal cashed about US$161 million worth of severance checks after leading Merrill Lynch to its largest loss in the firm's 93-year history. Prince received a $40 million farewell package from Citigroup. Kerviel will likely receive a jail sentence. Something is very wrong here.
Let's not blame the rogue traders or the hedge funds for the mess we're in, dear investor. Let's blame the rogue capitalists – the people who've turned financial companies into vehicles for funneling shareholder capital directly into their own pockets. These titans of the banking world were supposed to be the men and women that made Britain and America the best "allocators of capital" in the world.
Little did we know that these folks would excel at allocating your capital into their pockets…and would put the entire Western financial system at risk in the process.
Oil & Gold At The Top Of The Heap
Oil Battles Gold for Investment Supremacy
By: Richard Daughty
There are many of you who are skeptical of my claim that not only will gold and silver go up like they have in all the rest of the last 4,000 years of economic history when a government started creating excess money and credit like the stupid buttheads that they are, and I get tired of arguing with them because it is so hard to be convincing when it is obvious that I have no idea what in the hell I am talking about.
But while it is obvious that since gold and silver are going up because the Federal Reserve has debased the dollar so much, it is less intuitive that oil is on its way up, too.
That is why I am pleased to present part of an interview between Matt Simmons and Bud Conrad of Casey Research, which was published in the August 2007 edition of the Casey Energy Speculator, which has never interviewed The Mogambo, so that proves that they are a class act.
Anyway, they say that Matt Simmons has been an investment banker for 40 years, is founder and chairman of the world's largest energy investment banking company Simmons & Co. International, and that in 2005, he published Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, a book that, as they say, "has galvanized the peak oil debate." So he probably knows what he is talking about.
Well, I don't know for sure whether it galvanized the Peak Oil debate or not, but Mr. Conrad asked, "If I can just interject, when you look at the big picture, and try to get to the big numbers of 342 million barrels of oil equivalent per year from all energy types that the world will demand for its energy needs by the year 2030, you need huge increases not only in the production of oil, but you need the other kinds of energy. And you need a huge investment. I've seen numbers like $10 or $15 trillion in the infrastructure to get there. My question when looking at the big picture is - how are we going to fund that sort of investment?"
At the prospect of spending $15 trillion on oil infrastructure alone, I was instantly on my feet, shouting, "Yeah! Where? You got $15 trillion freaking dollars, pal? You do? Well, how about handing a few thousand down here? You won't miss it!"
Well, I am not sure to which question he was responding, probably both, but Mr. Simmons replied, "the odds of that happening are less than one percent." Naturally, even a bonehead like me knows that a one percent chance is not very good, and I saw that my chances of him coming across with that cool thousand bucks was now slipping away. But I cleverly figured that I could up the percentage if I sort of, you know, made vague threats of physical violence against him and his family (which is so popular around the globe these days), but I have to be careful since the judge came up with his, "This is the last time, you Vicious Mogambo Moron (VMM)! The next time you assault somebody, you're going down, whether or not, in your Stupid Mogambo Opinion (SMO), you think they deserve it,!" and I remember thinking, "I'll bet you wouldn't say that if I came up there and beat the hell out of you, you halfwit, loser, piece of judicial dog crap!", which I did not say out loud, which turned out to be a good thing, just like my lawyer said it would be!
But it turns out he was not even talking to me! He was responding to the suggestion that a mega-infusion of capital could save us from Peak Oil Armageddon, which everybody thinks is more important only because it wasn't THEY that was getting the thou!
Anyway, he says, "If we were lucky enough to open up the entire outer continental shelf and then we were lucky enough to invent quickly enough seismic equipment to start doing some sort of a high-grading of where we should drill, and then we were lucky enough to have a growing fleet of newer offshore rigs that could drill wells and we just discovered two new North Seas, then there's grounds that we could basically spend four or five hundred billion dollars and maybe end up ten years from now with six million barrels a day of fresh supply. But the problem is that each one of those things that I said, 'If we were lucky enough', we don't have. And to create each one of those is going to take ten to fifteen years to do. And ten to fifteen years from now, our 73 million barrels a day of current crude production could easily be down to 50 or 45. So you say even if you had another 6 million barrels per day, you can't climb back out of the hole."
But climbing out of holes is no problem for those who have gold, as is explained by Ross B. Hansen of Northwest Territorial Mint in his essay, "The Price of Gold Doesn't Matter". He writes, "After the past two months, it's difficult to remember that the year began with gold trading at $636.30, silver at $12.96, palladium at $335, and platinum at $1,139.50."
Now things are different, of course, but it is not just about gold. It's also about energy, and he notes that it is also hard to remember that "gasoline cost $2.38 on January 1 of 2007, according to the US Dept of Energy's Energy Information Agency. On December 31, that same fuel cost $3.10. That's an increase of 30%."
As an example, he says, "If in January of 2007 you had $637.50 to buy an ounce of gold, you could have bought 1 ounce of gold, or 267 gallons of gas. With that same $637.50 today, you could only buy about three-quarters of an ounce of gold, or 205 gallons of gas."
So why doesn't the price of gold matter? He explains, "If you were using gold as your standard, you'll discover that you can buy about the same amount of gas (actually, a little more) with the same ounce of gold you had on January 1", thus effortlessly demonstrating gold's "store of value" as it preserves buying power!
And for a guy who just wants a little gas in his car so that he can go out, have a few drinks with his hoodlum friends and make a creepy nuisance of himself by flirting with the waitresses until they get the bartender to come over and make me stop, then I agree; the price of gold doesn't matter, as all I want is a little gasoline! And a pizza. And some beer to wash it down with, too.
There are many of you who are skeptical of my claim that not only will gold and silver go up like they have in all the rest of the last 4,000 years of economic history when a government started creating excess money and credit like the stupid buttheads that they are, and I get tired of arguing with them because it is so hard to be convincing when it is obvious that I have no idea what in the hell I am talking about.
But while it is obvious that since gold and silver are going up because the Federal Reserve has debased the dollar so much, it is less intuitive that oil is on its way up, too.
That is why I am pleased to present part of an interview between Matt Simmons and Bud Conrad of Casey Research, which was published in the August 2007 edition of the Casey Energy Speculator, which has never interviewed The Mogambo, so that proves that they are a class act.
Anyway, they say that Matt Simmons has been an investment banker for 40 years, is founder and chairman of the world's largest energy investment banking company Simmons & Co. International, and that in 2005, he published Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, a book that, as they say, "has galvanized the peak oil debate." So he probably knows what he is talking about.
Well, I don't know for sure whether it galvanized the Peak Oil debate or not, but Mr. Conrad asked, "If I can just interject, when you look at the big picture, and try to get to the big numbers of 342 million barrels of oil equivalent per year from all energy types that the world will demand for its energy needs by the year 2030, you need huge increases not only in the production of oil, but you need the other kinds of energy. And you need a huge investment. I've seen numbers like $10 or $15 trillion in the infrastructure to get there. My question when looking at the big picture is - how are we going to fund that sort of investment?"
At the prospect of spending $15 trillion on oil infrastructure alone, I was instantly on my feet, shouting, "Yeah! Where? You got $15 trillion freaking dollars, pal? You do? Well, how about handing a few thousand down here? You won't miss it!"
Well, I am not sure to which question he was responding, probably both, but Mr. Simmons replied, "the odds of that happening are less than one percent." Naturally, even a bonehead like me knows that a one percent chance is not very good, and I saw that my chances of him coming across with that cool thousand bucks was now slipping away. But I cleverly figured that I could up the percentage if I sort of, you know, made vague threats of physical violence against him and his family (which is so popular around the globe these days), but I have to be careful since the judge came up with his, "This is the last time, you Vicious Mogambo Moron (VMM)! The next time you assault somebody, you're going down, whether or not, in your Stupid Mogambo Opinion (SMO), you think they deserve it,!" and I remember thinking, "I'll bet you wouldn't say that if I came up there and beat the hell out of you, you halfwit, loser, piece of judicial dog crap!", which I did not say out loud, which turned out to be a good thing, just like my lawyer said it would be!
But it turns out he was not even talking to me! He was responding to the suggestion that a mega-infusion of capital could save us from Peak Oil Armageddon, which everybody thinks is more important only because it wasn't THEY that was getting the thou!
Anyway, he says, "If we were lucky enough to open up the entire outer continental shelf and then we were lucky enough to invent quickly enough seismic equipment to start doing some sort of a high-grading of where we should drill, and then we were lucky enough to have a growing fleet of newer offshore rigs that could drill wells and we just discovered two new North Seas, then there's grounds that we could basically spend four or five hundred billion dollars and maybe end up ten years from now with six million barrels a day of fresh supply. But the problem is that each one of those things that I said, 'If we were lucky enough', we don't have. And to create each one of those is going to take ten to fifteen years to do. And ten to fifteen years from now, our 73 million barrels a day of current crude production could easily be down to 50 or 45. So you say even if you had another 6 million barrels per day, you can't climb back out of the hole."
But climbing out of holes is no problem for those who have gold, as is explained by Ross B. Hansen of Northwest Territorial Mint in his essay, "The Price of Gold Doesn't Matter". He writes, "After the past two months, it's difficult to remember that the year began with gold trading at $636.30, silver at $12.96, palladium at $335, and platinum at $1,139.50."
Now things are different, of course, but it is not just about gold. It's also about energy, and he notes that it is also hard to remember that "gasoline cost $2.38 on January 1 of 2007, according to the US Dept of Energy's Energy Information Agency. On December 31, that same fuel cost $3.10. That's an increase of 30%."
As an example, he says, "If in January of 2007 you had $637.50 to buy an ounce of gold, you could have bought 1 ounce of gold, or 267 gallons of gas. With that same $637.50 today, you could only buy about three-quarters of an ounce of gold, or 205 gallons of gas."
So why doesn't the price of gold matter? He explains, "If you were using gold as your standard, you'll discover that you can buy about the same amount of gas (actually, a little more) with the same ounce of gold you had on January 1", thus effortlessly demonstrating gold's "store of value" as it preserves buying power!
And for a guy who just wants a little gas in his car so that he can go out, have a few drinks with his hoodlum friends and make a creepy nuisance of himself by flirting with the waitresses until they get the bartender to come over and make me stop, then I agree; the price of gold doesn't matter, as all I want is a little gasoline! And a pizza. And some beer to wash it down with, too.
Interesting Article About A Mystery Of The World Economy
The black box economy
Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.
By Stephen Mihm January 27, 2008
THE PAST YEAR has been a harrowing one for the world's financial markets, shaken by subprime crises, credit crunches, and other ills. Things have only gotten stranger in the past week, with stock prices swinging wildly in every major market - drastically down, then back up.
Last week the Federal Reserve announced the biggest cut in overnight lending rates in more than two decades. Congress, not to be outdone, is slapping together a massive deficit spending package aimed at giving the economy an emergency booster shot.
Despite the anxiety, nobody is stockpiling canned goods just yet. The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end, much as they have since the Great Depression. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to mount a vigorous defense.
Should we be so confident this time? A handful of financial theorists and thinkers are now saying we shouldn't. The drumbeat of bad news over the past year, they say, is only a symptom of something new and unsettling - a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.
That something is the immense shadow economy of novel and poorly understood financial instruments created by hedge funds and investment banks over the past decade - a web of extraordinarily complex securities and wagers that has made the world's financial system so opaque and entangled that even many experts confess that they no longer understand how it works.
Unlike the building blocks of the conventional economy - factories and firms, widgets and workers, stocks and bonds - these new financial arrangements are difficult to value, much less analyze. The money caught up in this web is now many times larger than the world's gross domestic product, and much of it exists outside the purview of regulators.
Some of these new-generation investments have been in the news, such as the securities implicated in the mortgage crisis that is still shaking the housing market. Others, involving auto loans, credit card debt, and corporate debt, are lurking in the shadows.
The scale and complexity of these new investments means that they don't just defy traditional economic rules, they may change the rules. So much of the world's capital is now tied up in this shadow economy that the traditional tools for fixing an economic downturn - moves that have averted serious disasters in the recent past - may not work as expected.
In tell-all books, financial blogs, and small-circulation newsletters, a handful of insiders have begun to sound the alarm, warning that governments and top bankers may simply no longer understand the financial system well enough to do anything about it.
"Central banks have only two tools," says Satyajit Das, author of "Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives," who has emerged as a voice of concern. "They can cut interest rates or they can regulate banks. But these are very old-fashioned tools, and are completely inadequate to the problems now confronting them."
Since the last financial crisis that genuinely threatened the fabric of our society, the Great Depression, the United States has built a system of regulatory checks and balances that has, for the most part, worked. The system has worked because the new regulations enforced some semblance of transparency. Companies abide by an extensive set of rules and file information on their profits, losses, and assets.
Obviously, there are limits to transparency: Without withholding some information from public view, it would be hard for companies to take advantage of opportunities in the marketplace. But a modicum of transparency can go a long way, enabling both regulators and investors to make informed decisions. The advantages of the system are many; the costs of even a single case of nontransparency, as with Enron, can be high.
But when the mortgage crisis broke last summer, it opened a window on something else: The existence of a huge wilderness of investments in the financial sector that are nearly impossible to track or measure, and which operate out of the view of both investors and regulators. It emerged that investment banks, hedge funds, and other financial players had issued, bought, and sold hundreds of billions of dollars' worth of esoteric securities backed in part by other securities, which in turn were backed by payments on high-risk mortgages.
When borrowers began defaulting on their loans, two things happened. One, banks, pension funds, and other institutional investors began revealing that they owned huge quantities of these unusual new securities, called collateralized debt obligations, or CDOs. The banks began writing them off, causing the massive losses that have buffeted the country's best-known financial companies. And two, without a market for these securities, brokers stopped wanting to issue risky mortgages to new home buyers. Home values began their plunge.
In other words, a staggeringly complex financial instrument that most Americans had never heard of, and which many financial writers still don't fully understand, became in a matter of months the most important influence on home values in America. That's not how the economy is supposed to work - or at least that's not what they teach students in Economics 101.
The reason this had been happening totally out of sight is not difficult to understand. Banks of all stripes chafe against the restraints that federal and state regulators place on their ability to make money. By cleverly exploiting regulatory loopholes, investment banks created new types of high-risk investments that did not appear on their balance sheets. Safe from the prying eyes of regulators, they allowed banks to dodge the requirement that they keep a certain amount of money in reserve. These reserves are a crucial safety net, but also began to seem like a drag to financiers, money that was just sitting on the sidelines.
"A lot of financial innovation is designed to get around regulation," says Richard Sylla, professor of economics and financial history at NYU's Stern School of Business. "The goal is to make more money, and you can make more money if you don't have to keep capital to back up your investments."
The hiding places for these financial instruments are called conduits. They go by various names - the SIV, or structured investment vehicle, is one that's been in the news a great deal the past few months. These conduits and the various esoteric investments they harbor constitute what Bill Gross, manager of the world's largest bond mutual fund, called a "Frankensteinian levered body of shadow banks" in his January newsletter.
"Our modern shadow banking system," Gross writes, "craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever."
The mortgage-driven securities that have been making headlines are but the tip of a much larger iceberg. Far larger categories of investment have sprung up, with just as much secrecy, and even less clarity into who holds them and how much they are truly worth.
Many of these began as conventional instruments of finance. For instance, derivatives - the broad category of investments whose value is somehow based on other assets, whether a stock, commodity, debt, or currency - have been traded for more than a century as a form of insurance, helping stabilize otherwise volatile markets.
But today, increasingly, a new generation of derivatives doesn't trade on markets at all. These so-called over-the-counter derivatives are highly customized agreements struck in private between two parties. No one else necessarily knows about such investments because they exist off the books, and don't show up in the reports or balance sheets of the parties who signed them.
As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, Das - author of a leading textbook on derivatives and complex securities - estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion.
Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money. If they start to look shaky - or if investors need to start selling them to cover other losses - that value could vanish, with catastrophic results to the owner and unpredictable effects on financial markets.
Derivatives can ripple through the market and link players that might not otherwise be connected. With some types of new investments, that fusion takes place within the security itself.
For instance, some financial instruments are built of two or more different types of assets, linking together sectors of the economy that aren't supposed to move in tandem. In the name of transferring risk - and in the interest of creating an appealing new product to sell to aggressive investors seeking higher returns - a bank could create a CDO, for instance, that packaged subprime mortgages together with corporate bonds. An economist would expect those to move independently, but thanks to a large - and unseen - investment in such a linked package, problems with one could drive down the other. A bad apple can ruin an entire barrel of fruit.
Again, it's not as though anyone necessarily knows the composition of these structured securities. Nor do they know who has invested in them, thanks to the fact that they have not, until recently, counted as conventional assets subject to the normal rules of accounting. And because they don't trade on open markets, their values are essentially guesses, calculated by computer algorithms.
Das disparages much of this as the product of bankers creating "complexity for the sake of complexity," trying to wow their clients by inventing more sophisticated-seeming investments. "Financial innovation is a magical catch phrase," he explains. "It's very sophisticated and chi-chi."
"Investment bankers want to make them more complex, so that they won't be copied, and so that their clients won't understand them," he says. "When they ask whether they're paying the right amount, they won't know."
But when reality comes home to roost, things can get ugly pretty quickly: If an investor is forced to sell a CDO, the onetime price realized on the open market may bear no relationship to the theoretical value generated by a computer formula. That means that everyone holding CDOs can no longer sleep well at night: the same thing can happen to them.
T
hese risks are magnified, as they were during the stock bubble of the 1920s, by the fact that many of these assets are owned by investors who borrowed money to make the investments in the first place. When a market shock like the subprime crisis hits, it can send tremors through the system with incredible speed.
If the contagion spreads, the conventional wisdom holds that the Federal Reserve and other central banks around the world can step into the breach caused when consumers and investors start to lose their confidence. But what happens when all these complicated financial arrangements and instruments start to unravel? The market for one product alone - the credit default swap, or CDS - dwarfs this country's economy. The Fed has an uphill battle, made harder by the fact that it is grappling, to a large extent, with unseen forces.
In theory, additional regulation may help with this. The Financial Accounting Standards Board, which establishes corporate accounting procedures and guidelines, took a first step in that direction this past November, ordering investment banks and anyone else holding complicated securities to assign market values to so-called Level 3 assets - a fancy name for assets for which there is no prevailing market price. This meant assigning a market value to all those CDOs.
Banks promptly began writing down tens of billions of dollars of assets, and their investors are still trying to sort through the results. It's still too early to tell whether or not the effort will work, or whether the "market prices" that get reported are anything more than figments of in-house accountants' imaginations. For his part, Das is skeptical. "It will help that people will know the poison they're drinking," he says. "Whether it will help stabilize the system is another question."
It would be ideal if the financial markets became a bit less opaque and intelligible before that happens. That would be the job of regulators, but Das isn't sure that regulators have the intellectual horsepower to figure out what they need to do. "If you're bright and you can make $5 million a year on Wall Street," he asks, "why would you settle for making 50K as a regulator?"
And in any case, transparency isn't really what the denizens of Wall Street want, Das observes. "The regulators keep espousing things like clarity and transparency, but it's in the investment bankers' interest to keep things opaque." Das pauses for a moment.
"It's like a butcher. He doesn't want the buyer to know what goes into making the sausage." He chuckles, noting that it's the same with financiers. "That's what they're all about and always have been."
Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.
By Stephen Mihm January 27, 2008
THE PAST YEAR has been a harrowing one for the world's financial markets, shaken by subprime crises, credit crunches, and other ills. Things have only gotten stranger in the past week, with stock prices swinging wildly in every major market - drastically down, then back up.
Last week the Federal Reserve announced the biggest cut in overnight lending rates in more than two decades. Congress, not to be outdone, is slapping together a massive deficit spending package aimed at giving the economy an emergency booster shot.
Despite the anxiety, nobody is stockpiling canned goods just yet. The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end, much as they have since the Great Depression. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to mount a vigorous defense.
Should we be so confident this time? A handful of financial theorists and thinkers are now saying we shouldn't. The drumbeat of bad news over the past year, they say, is only a symptom of something new and unsettling - a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.
That something is the immense shadow economy of novel and poorly understood financial instruments created by hedge funds and investment banks over the past decade - a web of extraordinarily complex securities and wagers that has made the world's financial system so opaque and entangled that even many experts confess that they no longer understand how it works.
Unlike the building blocks of the conventional economy - factories and firms, widgets and workers, stocks and bonds - these new financial arrangements are difficult to value, much less analyze. The money caught up in this web is now many times larger than the world's gross domestic product, and much of it exists outside the purview of regulators.
Some of these new-generation investments have been in the news, such as the securities implicated in the mortgage crisis that is still shaking the housing market. Others, involving auto loans, credit card debt, and corporate debt, are lurking in the shadows.
The scale and complexity of these new investments means that they don't just defy traditional economic rules, they may change the rules. So much of the world's capital is now tied up in this shadow economy that the traditional tools for fixing an economic downturn - moves that have averted serious disasters in the recent past - may not work as expected.
In tell-all books, financial blogs, and small-circulation newsletters, a handful of insiders have begun to sound the alarm, warning that governments and top bankers may simply no longer understand the financial system well enough to do anything about it.
"Central banks have only two tools," says Satyajit Das, author of "Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives," who has emerged as a voice of concern. "They can cut interest rates or they can regulate banks. But these are very old-fashioned tools, and are completely inadequate to the problems now confronting them."
Since the last financial crisis that genuinely threatened the fabric of our society, the Great Depression, the United States has built a system of regulatory checks and balances that has, for the most part, worked. The system has worked because the new regulations enforced some semblance of transparency. Companies abide by an extensive set of rules and file information on their profits, losses, and assets.
Obviously, there are limits to transparency: Without withholding some information from public view, it would be hard for companies to take advantage of opportunities in the marketplace. But a modicum of transparency can go a long way, enabling both regulators and investors to make informed decisions. The advantages of the system are many; the costs of even a single case of nontransparency, as with Enron, can be high.
But when the mortgage crisis broke last summer, it opened a window on something else: The existence of a huge wilderness of investments in the financial sector that are nearly impossible to track or measure, and which operate out of the view of both investors and regulators. It emerged that investment banks, hedge funds, and other financial players had issued, bought, and sold hundreds of billions of dollars' worth of esoteric securities backed in part by other securities, which in turn were backed by payments on high-risk mortgages.
When borrowers began defaulting on their loans, two things happened. One, banks, pension funds, and other institutional investors began revealing that they owned huge quantities of these unusual new securities, called collateralized debt obligations, or CDOs. The banks began writing them off, causing the massive losses that have buffeted the country's best-known financial companies. And two, without a market for these securities, brokers stopped wanting to issue risky mortgages to new home buyers. Home values began their plunge.
In other words, a staggeringly complex financial instrument that most Americans had never heard of, and which many financial writers still don't fully understand, became in a matter of months the most important influence on home values in America. That's not how the economy is supposed to work - or at least that's not what they teach students in Economics 101.
The reason this had been happening totally out of sight is not difficult to understand. Banks of all stripes chafe against the restraints that federal and state regulators place on their ability to make money. By cleverly exploiting regulatory loopholes, investment banks created new types of high-risk investments that did not appear on their balance sheets. Safe from the prying eyes of regulators, they allowed banks to dodge the requirement that they keep a certain amount of money in reserve. These reserves are a crucial safety net, but also began to seem like a drag to financiers, money that was just sitting on the sidelines.
"A lot of financial innovation is designed to get around regulation," says Richard Sylla, professor of economics and financial history at NYU's Stern School of Business. "The goal is to make more money, and you can make more money if you don't have to keep capital to back up your investments."
The hiding places for these financial instruments are called conduits. They go by various names - the SIV, or structured investment vehicle, is one that's been in the news a great deal the past few months. These conduits and the various esoteric investments they harbor constitute what Bill Gross, manager of the world's largest bond mutual fund, called a "Frankensteinian levered body of shadow banks" in his January newsletter.
"Our modern shadow banking system," Gross writes, "craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever."
The mortgage-driven securities that have been making headlines are but the tip of a much larger iceberg. Far larger categories of investment have sprung up, with just as much secrecy, and even less clarity into who holds them and how much they are truly worth.
Many of these began as conventional instruments of finance. For instance, derivatives - the broad category of investments whose value is somehow based on other assets, whether a stock, commodity, debt, or currency - have been traded for more than a century as a form of insurance, helping stabilize otherwise volatile markets.
But today, increasingly, a new generation of derivatives doesn't trade on markets at all. These so-called over-the-counter derivatives are highly customized agreements struck in private between two parties. No one else necessarily knows about such investments because they exist off the books, and don't show up in the reports or balance sheets of the parties who signed them.
As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, Das - author of a leading textbook on derivatives and complex securities - estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion.
Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money. If they start to look shaky - or if investors need to start selling them to cover other losses - that value could vanish, with catastrophic results to the owner and unpredictable effects on financial markets.
Derivatives can ripple through the market and link players that might not otherwise be connected. With some types of new investments, that fusion takes place within the security itself.
For instance, some financial instruments are built of two or more different types of assets, linking together sectors of the economy that aren't supposed to move in tandem. In the name of transferring risk - and in the interest of creating an appealing new product to sell to aggressive investors seeking higher returns - a bank could create a CDO, for instance, that packaged subprime mortgages together with corporate bonds. An economist would expect those to move independently, but thanks to a large - and unseen - investment in such a linked package, problems with one could drive down the other. A bad apple can ruin an entire barrel of fruit.
Again, it's not as though anyone necessarily knows the composition of these structured securities. Nor do they know who has invested in them, thanks to the fact that they have not, until recently, counted as conventional assets subject to the normal rules of accounting. And because they don't trade on open markets, their values are essentially guesses, calculated by computer algorithms.
Das disparages much of this as the product of bankers creating "complexity for the sake of complexity," trying to wow their clients by inventing more sophisticated-seeming investments. "Financial innovation is a magical catch phrase," he explains. "It's very sophisticated and chi-chi."
"Investment bankers want to make them more complex, so that they won't be copied, and so that their clients won't understand them," he says. "When they ask whether they're paying the right amount, they won't know."
But when reality comes home to roost, things can get ugly pretty quickly: If an investor is forced to sell a CDO, the onetime price realized on the open market may bear no relationship to the theoretical value generated by a computer formula. That means that everyone holding CDOs can no longer sleep well at night: the same thing can happen to them.
T
hese risks are magnified, as they were during the stock bubble of the 1920s, by the fact that many of these assets are owned by investors who borrowed money to make the investments in the first place. When a market shock like the subprime crisis hits, it can send tremors through the system with incredible speed.
If the contagion spreads, the conventional wisdom holds that the Federal Reserve and other central banks around the world can step into the breach caused when consumers and investors start to lose their confidence. But what happens when all these complicated financial arrangements and instruments start to unravel? The market for one product alone - the credit default swap, or CDS - dwarfs this country's economy. The Fed has an uphill battle, made harder by the fact that it is grappling, to a large extent, with unseen forces.
In theory, additional regulation may help with this. The Financial Accounting Standards Board, which establishes corporate accounting procedures and guidelines, took a first step in that direction this past November, ordering investment banks and anyone else holding complicated securities to assign market values to so-called Level 3 assets - a fancy name for assets for which there is no prevailing market price. This meant assigning a market value to all those CDOs.
Banks promptly began writing down tens of billions of dollars of assets, and their investors are still trying to sort through the results. It's still too early to tell whether or not the effort will work, or whether the "market prices" that get reported are anything more than figments of in-house accountants' imaginations. For his part, Das is skeptical. "It will help that people will know the poison they're drinking," he says. "Whether it will help stabilize the system is another question."
It would be ideal if the financial markets became a bit less opaque and intelligible before that happens. That would be the job of regulators, but Das isn't sure that regulators have the intellectual horsepower to figure out what they need to do. "If you're bright and you can make $5 million a year on Wall Street," he asks, "why would you settle for making 50K as a regulator?"
And in any case, transparency isn't really what the denizens of Wall Street want, Das observes. "The regulators keep espousing things like clarity and transparency, but it's in the investment bankers' interest to keep things opaque." Das pauses for a moment.
"It's like a butcher. He doesn't want the buyer to know what goes into making the sausage." He chuckles, noting that it's the same with financiers. "That's what they're all about and always have been."
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