Chinese rate hikes. Passports. Economic Freedom and Civil Liberty

China has been raising interest rates a few times this year. This may be aimed at curbing inflation, because according to their figures, inflation has been rising at the fastest rate in 2 years. While credit has to be given that they are trying to do something about the inflation, I doubt that it will be so effective.

China raises rates but the US is not doing so. This will cause more foreign currency inflow into China to take advantage of the interest rate difference. The Chinese will then be 'forced' (well, they don't have to, but politicians don't know much) to increase their money supply in order not to let their currency appreciate too much. This will cause even more inflation in China. More RMB, higher prices.

What the Chinese should do in conjuction with raising interest rate is to let their currency appreciate. This means that they have to stop printing money! I've read somewhere that China prints US$ 250 billion worth of RMB annually. Which is not good of course. Stop increasing the supply of RMB, and prices in terms of RMB can be controlled. It doesn't matter how much 'hot money' flows into China. There WON'T be inflation if there's no RMB printing. Prices can't rise in terms of RMB if RMB money supply doesn't expand. Also, they should allow the RMB to be traded more freely internationally, otherwise all those RMB is been trapped in China and is causing price increases.

Keynesian Economics should not be taught in schools. Modern economics is a study of how to STEAL from the population. And theft should not be taught in schools. My hope is that one day the world will embrace Austrian Economics. I am not  hopeful that the governments will be the catalyst of this change. Well, maybe they will be, in a way, because they will screw things up so badly that the people will revolt. Austrian Economics preaches economic freedom, something which is sorely lacking in our world today. 

Just the other day on Christmas Eve, I was returning from Malaysia to Singapore. I got stuck at the Woodlands Checkpoint for 2 hours! There were throngs of immigrants and huge amount of hours wasted. In my opinion, passports do nothing but waste resources - time and money. Imagine the millions of man-hours lost at the checkpoints around the world annually. We could have used hundreds of thousands of man-hours, if not millions of hours, to breed fishes and distribute them to the poor and hungry around the world.

One may argue that without passports, there will be a huge influx of immigrants into Singapore, overcrowding an already overcrowded city. That may happen. But what about immigrants out of Singapore? If immigration is easier, people will move out too. There is only so much humans that can be crowded into this island. This wasn't a problem in the past in a passport-less world. I am not sure if it will be a problem now. In every society, there was a limit to how much population the land can support. A natural equilibrium should be reached.

One may argue that passports discourage crime. While I do agree that it does help to some extent, but I feel that the benefit is so minimal given the costs. You spend so much time and money just to prevent a few crimes. There has been research which shows that IDs do not help to prevent crimes or track criminals. 

I love Ron Paul's quote: "Governments are supposed to protect the secrecy of the people, not the secrecy of governments." 

Politicians just love to have control. They need it to further their political agendas and their careers.

If the governments really are so keen in tracking criminals, I have a better suggestion. Issue a barcode to each and every one in the population. To pass through a checkpoint, the immigrant just needs to scan his own barcode, much like how those barcode scans in the supermarkets operate. This will make immigration so much more pleasant, and save so much resources. How about not using any passport or this barcode at all? How about using those saved resources to hire private tracking companies? I am sure without this passport system, private investigative companies that track criminals will flourish.

Why aren't governments doing this on a large scale? Well, I think it is inertia, like Jim Rogers once mentioned in his book. The world just simply adopted the passport system that the British started to use on a large scale during the colonial periods. Before that, the world did fine without passports anyway. In fact, today there are still agreements between certain countries that travellers do not require passports to pass their borders. (Keynesians probably won't like my idea because they will say it destroys jobs - but this argument is invalid. Ah well, that's another topic of discussion)

I like to 'downscale' large issues down to an individual family unit. This helps us to understand things better. When a family is in debt, they need to work harder and save more, not borrow more and spend more (like the Western countries). 

And you will not want your parents to track every single thing you do, you do not want them to monitor which streets you pass through, which malls you visit everytime you go out to chill. You prefer to be left alone to do your own things. 

Why then do people allow their governments to track and monitor them? Why allow them to decide what you can or cannot do? Allow them to decide where you can or cannot go? Why allow them to dictate economic policies? Do they really know much more than us? Are our overlords so much smarter than the rest of the population, that they can know what the ideal interest rate is, which industry will be great, which form of energy is the wave of the future? People will argue that this gives a more stable society, but I think the free market can do a much better job. We do not have a stable world today, with all the business cycles and such.

Have sound money and free market capitalism. That's what will give us economic and individual liberty and stability. When a government fails, the entire nation suffers. When an entrepreneur fails, the damages are limited. Entrepreneurs (and thus the market) are much better judges of which businesses are viable. They spend their time, effort and risk their money for their ventures. Politicians, on the other hand, just need to write legislations and pass laws and then sit back and feel good about themselves.

To end this post:

Republics generally do not last 200 years. They all fail because of implosion of their finances. They self-destruct from within. Economic freedom and civil liberty can prevent this. Central planning and controls and regulations will not work in the long run. The politicians perpetuate the problems, and the population do not wake up until it is too late. This is pretty much what is happening in the US right now.

Anyway, Happy New Year everyone. Wish you more wealth and better health in 2011.

Short US govt bond

The biggest bubble in history!

:)

650 Years of Silver Prices and what it means

This is a 650 year graph of silver prices in terms of 1998 dollars (blue line) and silver/gold ratio (gold line) from 1344 to 2004. (To have a clearer view of the graph, you can go to http://goldinfo.net/silver600.html 

At first glance, it will seem that the price of silver is going down. But take note that this all the prices u see on the graph is in terms of 1998 dollars. What does this mean? I'll provide my 2-cents. 

In 1477, the price was $806 (806 "1998" dollars). Ever since the "peak" back then that you see on the chart, the price of silver in 1998 dollars has been declining steadily. Take another point in time, say the year 1998 when the price was $5 (5 "1998" dollars - I can't really see very clearly since the chart is so small, but let's take it as $5)

Now, if you live in 1998, you can take $5 and go buy an ounce of silver for $5. Suppose you decide to travel back in time to the year 1477. You bring along your $5 with you and approach a silver seller back there. Will he sell his silver to you for $5? DEFINITELY NOT! Not with your "1998" $5 note! He will demand $806 "1998" notes from you! Even if back then, silver priced in "1477" note is $1, he will not sell his silver to you for your $5 "1998" note. 

So what do we see here. The dollar has lost so much purchasing power between 1477 and 1998. A silver seller back in 1477 will demand more than 160x of the dollar that you use in 1998. This chart does not show that silver is falling in value, but rather, it is showing that the dollar is falling in value. 

 

US default 1971, Supply Vs Demand

After WWII, the world was under the Bretton Woods System. All currencies were tied to the USD, and the USD in turn was redeemable in gold. Back then, the US possessed about 22,000 tons of gold, or about 75% of the world's monetary gold!

By 1971, the US had only 7200 tons of gold left, and owed other nations close to 40,000 tons. Alarmed at how fast gold was leaving the US, President Nixon conveniently announced that the USD will no longer be convertible to gold, therefore closing the gold window. The world currencies started 'floating' against each other, without any tie to a physical stuff whatsoever.

In my view, this is equivalent to a default by the US. The US now has unrestrained power to print money to repay its debt. The world quite foolishly agreed to what the US did, because they thought that the USD was as good as gold. 

Back then, the US was still a creditor nation and had a manufacturing base. Fast forward to today, it has become the largest debtor nation in history! It will be much harder to dig themself out of debt this time round, because they are not producing much stuff as a nation. Exporters to the US will suffer for a while, but if they can retool themselves and sell to other nations, then they will be much better off, because the currencies of other nations are sounder than the USD. 

If the USD tanks, it does not mean that demand will drop sharply and the world will be doomed and gloomed, because the purchasing power lost by the USD will simply be transferred to other currencies. The largest creditor nations to the US, China and Japan, will benefit greatly given that they no longer have to throw good money after bad. They will no longer lend to the US. A huge burden will be suddenly lifted off their backs. Their currencies will appreciate relative to the USD, and purchasing power will shift across the Pacific Ocean.

People will do well to get out of the USD or US-denominated assets and into hard assets (commodities) or other sounder currencies.

It's all about keeping oneself in an asset that will gain in PURCHASING POWER. 

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I will quote from my memory 2 of my favourite excerpts from Peter Schiff, with some of my comments added in:

1) If you take US out of the globe, you are left with the producers (Asia). The producers can consume their own products just as well as the US. Everyone will have a higher standards of living! The Chinese will no longer have to work as hard, just to produce stuff for the US, and then lend money to the US so that the US can buy the Chinese-made stuff. If you take the rest of the world out of the globe, you are left with the consumers (US). Who is going to produce for them and how are they going to survive? So you see, the US is the one holding the rest of the world down right now. 

2) (Can't remember the exact details for this one, but the idea is there): Imagine 5 people stranded on an island. One of them is American. The other 4 are Asians. These 5 people need to survive, and they need to gather food and cook, so each of them are assigned different tasks to do. Everyday, one of the Asians is assigned to the role of fishing. The 2nd Asian is assigned the job of collecting firewood. The 3rd Asian collects fruits from all over the island. The 4th Asian is responsible for cooking. And the American? He is assigned the job of eating. So at the end of each day they will gather around and eat. The American eats most of the stuff, leaving just enough crumbs for the Asians, so that they will have enough energy to do their job again the next day. 

Now, a modern economist will look at this island-economy and say: Look! The American is the engine of growth! Without his demand, all the Asians will have no job!!

Well, the reality is, the Asians can consume those food just as well as the American can. In fact, if they kick the American off the island, now they will have much more to eat. They may not even have to work as hard to feed the ravenous appetite of the American. They can take a day or 2 off, relax on the beach, etc.

=================================

There you go! Modern economists focus so much on 'aggregate' demand. They think that demand is everything. This is classic Keynesianism (Now I know why I have no interest in my economics class in university). Unfortunately, supply is what makes an economy. If you want to produce more, if you want more of other people's stuff, you have to produce some things yourself which you can then trade away. Demand is not so important. Everyone has demands for more materials and a better life. Even babies can demand for milk and toys and sweets. The problem is whether you can produce those goods, or whether you can produce something else to trade for those goods with someone else.

Economies don't grow with demand per se. And they certainly don't remain healthy due to 'consumer confidence', like most economists will say. To quote Tom Woods, if you think consumer confidence is so fundamentally important, why not pour money into researching a "happy pill" or something. That will keep everyone happy and confident and spending away, and the economy will not crash.

So, what is the US exporting to the world?? Paper money! And inflation! Why the world will accept this paper money is beyond comprehension. And this applies to all other currencies as well. The world should be furious that an elite group of people is controlling the money, taxing the population with inflation, and creating booms and busts in the economy and profiting from them.

If there are no central banks in the world, and if there is no fractional reserve banking system practised by the banks, the world will be a much better place. Less wars, less poverty, more individual liberty.

$600 billion 'stimulus' package

Another nail in the coffin for the US economy, as simple as that.

Unfortunately, the Fed Chairman doesn't know history, economics and currencies. Or maybe he does and is doing this on purpose. If this is the case, then he will be the biggest criminal in the world.

Austrian Economics

Great lesson by Thomas Woods!

Great speech by an Austrian Economist!

Great speech by an Austrian Economist! 

http://www.youtube.com/watch?v=czcUmnsprQI

Gold at record highs, even more gains for silver

Gold has been hitting record highs recently, breaking the $1,300 level. Its sister metal silver has hit the highest level in nominal terms in 30 years. Silver has gone up 17% in the month of September. Nice numbers indeed, but this is just a prelude to a greater show that is to come a few years down the road. 

So Bernanke and Geithner said that the US needs a second QE. Quantitative easing, what a nice euphemism for inflation, which in turn is a nice euphemism for wealth-stealing. 

If printing money makes a nation rich, Zimbabwe will be the richest nation on earth by now. Printing money does not increase real wealth. It merely re-distributes wealth in the population from the man on the streets to the money printer. Here's a simple example to illustrate my point:

Say there're only you and me on this island, and an apple seller with 2 apples to sell. You have $10, I have $0. So 2 apples will cost $10, or $5 per apple. Now I magically create $10 out of thin air. The total money supply in the system jumps to $20. By the law of supply and demand, I will compete with you for the apples, and each apple will now cost $10. Your $10 can only buy you an apple. You have lost half your wealth to me. I have stolen wealth away from you by printing money. But the collective wealth of the island certainly hasn't increased! Lots of paper money gives the illusion of wealth. 

Real wealth comes from being more productive. I highly recommend the book "How an Economy Grows and Why it Crashes" by Peter Schiff. I will do a short book review on it soon. It's a great book for economics novice and experts alike. Tremendously easy and fun to read, I finished it in a matter of hours. In terms of impact on my knowledge, I will rank it on par with Mike Maloney's Guide to Investing in Gold and Silver. Mike's book introduced me to Austrian Economics. Schiff's book really hammers in the super basic concepts of economics.

After studying Austrian Economics and listening to Schiff, you will understand how easy economics is. And how ridiculous politicians are in trying to micromange it. The US is debasing its currency like no tomorrow. And the world is also in the race to devalue their currencies against the USD. The countries are in a race with each other to the bottom. What utter foolishness.

1 in 7 Americans are living below the poverty line. 1 in 8 Americans are on food stamps. More and more Americans are living from paycheck to paycheck. According to a study done by careerbuilder.com, in 2007, 43% of Americans said they are living from paycheck to paycheck. In 2008 it was 49%. In 2009, the supposed year of great stimulus and great recovery, the figure was 61%. And in 2010, the year when it was announced that the recession is officially over, the number jumped to 77%. Does this look like the richest nation in the world? I beg to differ. Without the life support from China and Japan, the US will be long gone. 

The US has no savings. It is living off the savings of the Chinese. Why should the Chinese work so hard, save so much, and lend it to the Americans so that they can consume the goods that the Chinese make? It makes no sense and the Chinese will wake up to the reality that they can consume those goods themselves. They can enjoy the fruits of their own labour.

In the next few years the world will see the great flaw of Keynesian economics, which focuses on demand-side economics. People may come to realise that it is supply and production which really matter. And hopefully, the world can also come to see the great immorality of Keynesianism.

Greenspan and Gold

So the former FED chairman has been touting the merits of gold in the media recently. Now that he is retired, he can finally tell the truth. He is of the view that fiat currencies have no place to go but gold.

He has advised central banks to keep a close look on gold, and also influenced John Paulson, one of the star hedge fund managers, to start a gold fund which focuses on gold mining stocks and gold-related investments. 

Why is Greenspan in support of Gold now, but not back then when he was Fed chairman? Afterall, his policies were similar to Bernanke's policies. Low interest-rates, flood the economy with paper, easy money. He was the one who blew up the real estate bubble in 2007 when he tried to re-flate the economy from the dot com bubble burst back in the early 2000s.

It shouldn't be surprising that Greenspan recently made these gold-related comments. In fact, it gives credence to gold vs fiat currencies. Greenspan was once a supporter of the Gold Standard, but he had sold his soul to the Fed when he became chairman of the organisation in 1987. Noted investor, author and commentator Jim Rogers has claimed that Greenspan lobbied to get this chairmanship in his book Adventure Capitalist (It's a great read by the way).

It's too late, Mr. Greenspan. He has destroyed millions of lives and possibly an entire generation with his printing presses.
 

For me, being a central banker is one of the worst crimes in humanity.

US Recovery.... Not!

So the US govt tells us that they are on the road to recovery. I would beg to differ. Unemployment is still way to high (22% if you use the past method of measurement). Deficit is increasing. Debt is exploding. Government is getting bigger and sucking the private sector dry of resources.

The reported 2009 budget deficit was $1.4 trillion. But according to John Williams from shadowstats.com, if one were to use the same accounting methods that businesses are required to use, this deficit jumps to $4.3 trillion. That's about 30% of the US GDP. Look at how much trouble Greece got into with their deficit at about 10% of GDP.

Democracy has an inherent flaw in that it gives rise to populist governments. And populist governments more often than not drive up the national deficits and debts. Here are the largest annual contribution to the outstanding public debt for each of the preceding US presidents: Nixon $30.9 billion, Ford $87.2 billion, Carter $81.2 billion, Reagan $302 billion, Bush(Sr) $432 billion, Clinton $347 billion, G.W. Bush $1,017 billion, and now Obama $1,885 billion.

Professor Laurence J. Kotlikoff, Professor of Economics at Boston University, says the US, and even IMF data, reveal that the US is already bankrupt. That is due to its unfunded Medicare, Medicaid, Social Security, defense and other liabilities totalling $202 trillion, or over 14 times the annual US GDP of $14 trillion.

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Americans are having a hard time getting a job. The chart here shows the median duration of unemployment. It has risen straight up to more than 2 years. Imagine going 2 years without income! You'll be utterly broke. Not to mention that the Americans have ultra low savings. An interesting tidbit to share: More than half of the Americans have less than $10,000 saved up for retirement.A study conducted by Boston College's Center for Retirement Research says Americans aged 32 to 64 are $6.6 trillion short of what they need to retire. And the assumptions used in this study were conservative.

Obama is still trying to create more jobs with the $50 billion infrastructure stimulus. But what's the use? Why spend unnecessary resources building and repairing roads just so that some people can have jobs? Afterall, all these jobs are non-productive and will not strengthen the economic fundamentals. If the previous $1 trillion "stimulus" package doesn't work, why would a $50 billion package work?

Analysts agree unanimously that the USD will weaken against other currencies, yet at the same time they proclaim that the US economy (70% based on consumer consumption) will strengthen. I think this is contradictory. If you want consumers to spend more, you need more purchasing power, a stronger dollar. A weak dollar can't buy you many things.

Obama's administration also advocated a weak dollar because it helps in exports (making US goods cheaper and therefore more competitive). Have we seen a reduction in the trade deficit in the past decade, while the USD has been getting weaker? Not so! This idea is flawed. The strength of a currency is indicative of the economic well-being of a nation. Strong economies have strong currencies. The US used to have a strong currency, they were the largest creditor nation, they pay the workers the highest wages, and yet they have one of the cheapest and best-quality products. I remember back in my younger days, I still see Made-in-US products (although it's very few), but now there are none at all. Back then, I read of the American tourists spending money like no one's business while on vacations in Europe and Asia, because their currency was so strong. Things were cheap for them. Now the reverse is true.

The real problem with the current trade deficit lies in the policies that the US govt has been pursuing for years and decades. Growing govt crowds out the private sector, reducing the capital available. The cost of capital is high. Higher taxes take away the incentive to produce in the US. Excessive regulations increase the cost of operation.

So what are they gonna do? Well, Bernanke's recent speech shows that they are most likely going to print more money. The rest of the world usually follows suit. And this means much higher prices for real assets.

Peter Schiff da man!

I certainly learned a lot from this man. I think i watch at least 30mins to 1 hour of his videos everyday on average. Unfortunately he did not win the Connecticut 2010 Primary. What a shame for the Americans. From this I can safely conclude that a lot of people over there are still very clueless about economics - specifically AUSTRIAN ECONOMICS. And this is certainly very bad news for the US.

Fed to buy up US treasuries

There you have it. The Fed came out recently and said that they are not going to shrink their balance sheet and they are buying up US treasuries to help the economy grow. 

Remember a year ago when they said that they have an exit strategy? I thought it was nonsense at that time. They had no way of unwinding their toxic assets. So now one year later, where is that exit strategy?

Now that the Fed has admitted that it will buy up more treasuries, it should be a good signal for investors to sell. Throw the junk government bonds back to the Fed, and use the cash to invest somewhere else. Otherwise, the bond market will collapse in the near future. As more investors realise that the US bond is junk (and I really mean they are junk-grade, not Aaa !!), they will get out of this market, causing prices to fall and interest rates to rise. 

In fact, bond prices should have already fallen long time ago, if not for the fact that investors still perceive the USD as a safe haven, and if not for the fact that the Fed is printing money to buy up their own bonds. When prices fall and interest rates start to rise, the US will really suffer because of their huge debt obligations. Interest-rate wise, right now the govt are just at where the sub-prime home owners were a few years back: they're still on a teaser-rate.The US is completely dependent on low interest rates now.

When interest rates rise, the US has to default, either outrightly or through inflation, the worst being the latter. And judging from the Fed's and politician's historical actions, the latter seems far more likely than the former. Foreign lenders are also increasingly aware of this problem, and they should sell their US debts asap. With foreigners getting rid of their USD by buying up stuff using USD, all the USD will go home to the US to roost. At that time they will face hyperinflation, if they haven't already from the Fed's printing press.

Wealth is purchasing power, and it will not be destroyed when the US collapses. It will simply be transferred to other parts of the world. Sure, there will be some repercussions as exporters dependent on the US consumption will see their businesses take a hit. But there are scores of people well-positioned to benefit from this. China, for one, will see an immense rise in purchasing power through appreciation of their currency relative to other currencies. The chinese will then be able to produce goods and consume their own goods. What is happening now is that the Chinese is lending money and exporting goods to the US so that the US can use the borrowed money to buy the Chinese products. All these just so that the Chinese workers can be paid and have a job. They work so hard but they consume so little. No one works for the sake of having a job. All slaves have a job too. Now the Chinese are exporting goods to the US and the US are exporting inflation to the Chinese. 

In the near future, there will be more and more young westerners in Asia. They have to flee their debt-riden countries. Asia is where the assets are and historically, people always move to places where the assets are. They are not going to stay in their own country and shoulder the burden of the debts.

The US is crumbling from within. Even all its military might will be significantly reduced. Can you have the world's most powerful army when it exists on credit cards? When the world stops lending to the US, the army will be gone as well.

Sayonara US, you are essentially bankrupt.

Quote by Thomas Jefferson

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property - until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people where it properly belongs.

- Thomas Jefferson, 1802

This is so true of our world today. Nowadays, only the politicians and bankers have control of the currencies. The population is at the mercy of these people. I believe every country will end up this way. It is only logical: Print money --> middle class (and the poor) loses purchasing power and wealth --> Demise of the middle class --> chaos. It has been happening in the US since 1913 when the Fed was first created. Here're some statistics:

http://www.businessinsider.com/22-statistics-that-prove-the-middle-class-is-being-systematically-wiped-out-of-existence-in-america-2010-7#83-percent-of-all-us-stocks-are-in-the-hands-of-1-percent-of-the-people-1 

Government is a necessary evil

I like this quote:

"Government spending does not create prosperity. Government is an expense to any nation, it is a necessary expense when it is confined to its legitimate role of simply protecting natural rights from legitimate foreign and domestic enemies, but when it ventures beyond this role and takes on the powers of economic manipulation, it destroys wealth which is the basis of prosperity. Instead of making us richer, it actually makes us poorer for it."

Government is a necessary evil. We can't do without government, yet the flaw of democracy is that govenment is always allowed to grow too big. Eventually it will burden a nation so greatly that it will break down. This is what has been happening for years in US, some European countries, and Japan. The breaking point will be pretty soon.

What's next for US?

The US is bankrupt. What will the US do next?

More wars? More resource-stealing?

Or like Jim Roger says, print money until the world runs out of tree?

Why Miners/Farmers/Fishermen should earn more than Bankers (Real Goods Production Vs Service sector)

Today, many developed nations have a large chunk of their economies dedicated to the service industry. We see huge payouts for bankers and the financial services industry, for example. The US, for one, has become a service economy (Note: Service jobs can range from burger flippers to bankers). But should a healthy economy really be this way?

My simple answer is no. Here is my case for it:

Let's go back to ancient times, when barter trading was the norm and money as we know it still doesn't exist. Let's say I am a cow breeder and you are a fisherman. Every week, I will walk my cow 1 km to your place to trade for some fish. I have purchasing power in terms of cows. Now to get more fish, or in other words to increase my purchasing power, I have to produce more cows. This is the same for our world today. If you want to consume more, you have to produce more. Sadly, this is not the case for the US.

Back to the illustration. So to increase my purchasing power, I breed more and more cows. I became so busy that I had to hire an errand boy to walk my cows 1km to your place every week, while I stay back and tend to my cows. This errand boy can be categorised as a service industry worker. To reward him for his work, I pay him, say, 1 cow for every 10 cows he trades for fish. For every 10 cows traded, his purchasing power is 1 cow, my purchasing power is 9 cows. 

Fast forward to today's economies of the Western world. It seems like the errand boy (the service sector worker) is now earning 20 cows of purchasing power, while I, the real-goods producer, is earning say 5 cows (Sorry, I'm lazy to dig out the figures that I have in my research, so I'll just use some random figures. Do some googling I'm sure you can find some data). How can this type of economy be sustainable in the long run?

Sure, the US politicians and economists would have you believe that the budget deficit is actually a good thing. For even though they have a monstrous trade deficit, they have a capital account surplus. Well, the term surplus does have a nice ring to it. They argue that foreigners are still pouring capital into US, investing in US assets. But what they fail to mention is that the US has to give something in return in the future. Foreigners may be buying US treasuries, but alas this money sure doesn't make the US rich. Instead, they have a liability to repay this money some time in the future, plus interest. And furthermore, foreigners are waking up and realising that the US treasuries will no longer be a safe haven. They are not gonna lend as much to the US. Sovereign bonds are the next big bubble.

And what is the US doing with all these borrowed money from abroad? That's right, they spend it all!! Instead of investing in productive capacity to produce more cows, the government is just hiring more and more errand boys (for eg, they recently hired hundreds of thousands of census workers, and this number greatly skewed the jobs figure (which is manipulated, of course). Again, I forgot the figures, but search online, you can find it pretty easily). See, governments can create jobs, right???

The US has no means to repay the borrowed money, other than printing money and repaying in cheaper dollars. In other words, for every cow that I produce and lend to the US, I can expect to get back 2 cows - 2 very skinny cows, that is.

And don't forget that they are not just borrowing. They are printing money like mad. The whole world is printing money like mad. They are printing cows out of thin air. As a cow breeder, my purchasing power is being diluted like mad. All currencies are falling in value. I'm not talking value relative to other currencies, but value relative to real tangible goods. 

Buy gold and silver. I for one, am borrowing money to buy. The returns will be phenomenal.

Europe Debt Crisis

For the past few weeks, the media has been focusing on Greece and its sovereign debt problems. It seems like the mainstream media has finally caught up with the trouble in Europe.  

As expected, the politicians succumbed to printing money and borrowing and bailing Greece out. It would have been a wise option to let Greece go bankrupt, because this will give a signal to investors that the EU is serious about building a strong Euro currency. But of course, politicians always don't like this option.

Now that the EU (the US is gonna join in the bailing too) is bailing Greece out, there will be more countries asking for assistance - Portugal, Spain, Italy and Ireland. 

Investors have been getting out of Euro into the perceived safe haven of USD, but they will soon realise that the US is in worse shape than Greece. The USD has been strengthening against the Euro, but people are mistaking this for a real strength in USD. If the USD is fundamentally strengthening, gold price would have been dropping. Gold price has held steady around the $1100 level for the past few months, and it breaks $1,200 a few days ago.

The entire world is in debt, and it will never be able to repay all its debt. NEVER. It is just mathematically impossible. Our debt-based monetary system has eventually shown its fatal flaws. The weakest link falls first, and then there will be a cascading domino effect on the other nations. 

This whole system will implode on itself spectacularly. The question is whether we can position ourselves to profit from this. In a few years' time, there will be a huge transfer of wealth from currency holders to those holding real assets such as precious metals, especially silver. So, be prepared for it!

Well done Obama

The feel-good president just passed the Healthcare bill. Well done, another mind-boggling crazy spending program. The US cannot afford it. This is irresponsible and immoral, because ultimately the public, both current and future generations, will have to pay for it.

Well, on the brighter note, this will accelerate the collapse of the USD. And hopefully the people can understand the flaws of the currency quickly and move towards a sounder currency sooner rather than later.

So much stupidity is going on that I am just too lazy to explain them all.

Economic Warfare

We are now witnessing the opening salvos of an economic warfare between the US and China. Whether politically-motivated or just trying to err on the side of caution, China is declaring that it will start selling off the riskier US-denominated debts - those not guaranteed by the US govt/treasury. 

So the US still thinks that it can dictate what China should do. In reality, they should be very afraid of China, and listen to what the Chinese has to say, and pay attention to what the Chinese can do. The Chinese can easily screw the US by mass-selling their US-debt holdings, and stop buying US debts. It is already happening. China's US debt holdings have begun to drop last year. And now the Chinese government is getting its people to sell off more US-debts.

What this means for US: More and more dollars flooding the market (as if Helicopter Ben is not enough), and a real chance of hyperinflation. Well, even without this Chinese action, Helicopter Ben will make sure that hyperinflation happens.

Today, I read in the papers a comment by an economic Nobel Laureate Joseph Stiglitz that people are over-reacting to US debts, that the US can easily avoid debt-default just simply by printing money. Is he nuts? This is exactly the kind of Keynesian garbage that 99% of the earth's population has been brain-washed into believing. This guy is missing a point here. Sure, the US can print and print, but by doing this, they are still going to default: through inflation. Their currency will be so worthless by then.

The US will default at current trajectory. It has defaulted before. The most obvious in recent history being the default in 1971, when the US told the world that the USD is no longer redeemable for gold. The world has trusted the USD to be as good as gold, which is why they allowed the Bretton Woods system to exist in the first place. But alas, things are not to be.

The recent focus on Greece is just a distraction. Soon, people will start noticing that the US is in an even bigger hole.

China, for one, has already noticed this long ago. And they know they have the economic trump card to make US bleed massively. After such a long time, they finally declared the obvious: sell US debts.

And so it begins..

I'm a farmer!

Just started work in an aeroponics farm today! It's a great chance to study agriculture.

Next 10 years = years for precious metals and agriculture commodities! The bull run should last even longer for agriculture.

I am also in the process of setting up a company dealing with silver bullion, with a friend. Our website - in addition to silver bullion products - will contain educational information on what money really is, how money comes about, and what the banks and the governments around the world are doing to our money in the modern world. More details will be posted later!

On another note, I've recently watched Obama's State of the Union address too. It's the same old stuff. No fundamental changes to the way the economy functions. Only on-the-surface changes which he thinks are real changes. And then he outlined some contradictory plans too: Ever-increasing spending, tax cuts for the majority of the nation, more borrowings, and at the same time talking about getting the budget deficit under control.

The US can only fund its $3.8 trillion in spending plans for this year with $2.4 trillion in tax revenues. Where will the other $1.4 trillion come from? From foreign lenders, and from the printing press. But with China already scaling back in their lendings (and starting to sell US denominated debts), and other nations following suit, the printing press will become a much more viable option.

Note that I use the word 'spending', because the US are not investing their money.

This is the madness of Keynesian Economics. Spend your way out of trouble! Too bad they will soon realise that a national budget is no different from a household budget.

It would be interesting to watch his State of the Union address again one year from now and see what he has to say.

Why China Sells Bonds, US has no exit strategy

http://sg.news.yahoo.com/ap/20100124/tbs-as-china-bank-of-china-618743b.html

China has $2.4 trillion in reserves. It has so much cash that it does not know what to do with it! Why then, do they need to sell bonds (or debts)? Definitely not because they need more cash.

They are preparing the world for the coming decline of the USD. With the reckless inflationary policies of Washington, the world has been gearing itself up for the day when the USD is no longer the world reserve currency. For decades, trades around the world has been done in USD. This demand for USD has allowed the politicians in US to spend recklessly, thinking that it can go on forever, thinking that the model of consumption by the US and production by the rest of the world is sustainable. Now it's all coming to an end.

China is selling bonds to increase the liquidity of the Yuan. It is as obvious as that! The Chinese know that they are going to be the next economic superpower, eclipsing the US, and they are preparing the world for it!

The US commercial real estate looks set to burst next. When that happens, we can expect the politicians there to print even more money. This dose of money may prove to be fatal, the final straw for their dollar. Bernanke keeps saying that he has an exit strategy. He thinks that he can stimulate the economy and then exit. This will never be possible. Once the stimulus is removed, all the propped-up bubbles will collapse again. The best exit strategy is not to stimulate at all! All that he has done is to stimulate the collapse of the dollar.

The subprime crisis was caused by Greenspan and Bush. Interest rates were lowered to 1% back then. And budget deficit was around $200 billion if I recall correctly. With these, they created this monster of a subprime bubble, and the worst recession since the Great Depression. Fast forward to today, and we see interest rates at 0%, and budget deficit of more than $1 trillion!! Imagine the chaos that is to come. It's madness.

I have no sympathy for Bernanke and his Washington and Wall Street cronies at all. They have destroyed Americans' lives and the value of the Dollar. I would really love to see their faces when the next crisis hits.

Does China need US demand? Why is China not letting its Yuan go up?

Here's a 2nd post in a day, a continuation of the previous post. Seems like there's a word limit on blogger posts.

The Chinese need not sell to the US. The issue is not with demand, but rather, supply. And the Chinese has no problem with supply. Demand need not be stimulated. Anyone will desire a big house, a big car, a plasma TV, good food, a private jet, and the likes! If the USD falls in value and they stop buying from the Chinese, the Chinese can now consume their own goods.

Why is China not letting its Yuan go up?

People say that China is doing this so that it will give their exporters an edge. A lower Yuan means that the Chinese goods are cheaper and more competitive in the global market. Also, the Chinese may need some time to develop their own domestic market, so that they will be less reliant on exports to the US. But maybe this is just half the story.

I guess maybe the Chinese are just buying time to get rid of their USD bonds, the $800billion in USD that they hold. If the Chinese let the Yuan appreciate now, it will mean that the USD drop a lot. It will mean that 1/3 of their reserves get wiped out. And it will mean the Chinese lose a lot of money. If you have been immunised to this sort of figure, here's something to put things into perspective: the US took 200 years to build up its monetary base to $800billion!

I think the Chinese knows that the USD only has one direction to go, and that is downwards. So the faster they sell away all their US debts, the faster they let their currency appreciate, the better it will be. But they are delaying this, maybe because of lack of political guts, or perhaps they are just buying some time for themselves first.

Principle of Conservation of Purchasing Power, US Consumption, US-China-Gold Dynamics

A lot of people argued that the US is the engine of growth for the world. They consume what the world produces, that is why we have so much prosperity. People will say that without the US consuming, the world will hit a great Depression. So the world has no choice but to keep on lending to the US, and then the US use that money to buy from the rest of the world.

Well yes, this scenario is somewhat true, but only decades ago. It is totally different now. Even if the USD falls today, even if their demand falls, it is not going to matter to investors who know where to put their money. Even if the world falls into a great Depression because the US can no longer buy all the world's stuff, it is not going to matter to these investors. Stocks may crash everywhere, markets may go down everywhere. But the one thing that will not get destroyed is this: purchasing power.  Purchasing power is like the Principle of Conservation of Energy in the laws of Physics. We should have the Principle of Conservation of Purchasing Power in Economics too (do we already have this? I'm not sure about this, but a quick search on Google returns no relevant results). Maybe people will understand things better that way.

Purchasing power will never get destroyed even if stock markets crash, or even if the world trade gets reduced by 30% or 50%. Purchasing power merely gets transferred from one place to another. Yes if the US falls, we all will be affected, including China. But the Chinese Yuan will have so much more purchasing power. Just simply by printing money and borrowing like crazy, the US is transferring its own purchasing power to other parts of the world. The other nations don't even have to do a thing! And imagine what the Chinese Yuan will be worth once their government lets it appreciate. The smart investors will invest in things that will increase their purchasing power. And one glaring obvious place to be in is China. 

From my rants in my previous post, we all know that the economic power of the world is migrating from the US into China. When the USD falls, US can no longer buy that much goods anymore. The Chinese will be able to enjoy the fruits of their labour. They will be able to consume the stuff that they produce, instead of having to ship them all to the gluttony of the US.

Well of course, when the US crashes, the whole world will be affected, including the ordinary Chinese people. There may be temporary hardship for the Chinese. But I think their government is smart, and they are developing their domestic market right now so that they won't be too reliant on exports to the US. Hopefully they will make it in time to lessen the adverse impact on their own market. For the rest of us, oh well, better put our money in places where the purchasing power will be magnified!

If China can trade all their $800billion of USD right now for gold, they will do it in a heartbeat. The problem is that this sum is too huge, and they will cause a lot of disturbance in the gold market. And another problem is that there are not enough people who want to buy the USD from them, and there are not enough people who want to sell gold to them.

There has been a lot of complains from the US that the Chinese are artificially suppressing the Yuan. What will happen if the Chinese actually appreciates the Yuan? The US will be doomed right now. The Chinese suppress the RMB by selling their RMB for USD. Selling more of RMB means the 'price' of RMB goes down. When China stops selling their RMB for USD, the 'price' of RMB rises, the 'price' of USD falls. So right now if the Chinese heeded the US' call for them to stop supressing the Yuan, the US will just be meeting its doom faster. Is this all just a theatrical act by the US? They 'need' the low Yuan to further perpetuate their bubble, not a high Yuan. Maybe they don't know what they are really talking about.

Dynamics of Treasury Bonds, ARMs, and the Federal Reserve

Bonds have face value of say: $1000. Investors bid for the bonds. The more investors there are bidding, the higher the bond price will go (high demand, higher cost). Eg. Say the winning bid is $990. So the yield is $10/$1000, or 1%. That's because at the maturity date, the government will pay you the face value of $1,000.

If there are less investors, the bond price will drop (low demand, lower cost). Eg. Say the winning bid is now $950. So the yield is $50/$1000= 5%.

Basically, high bond price = lower yield, and low bond price = higher yield.

Last year, the US issued $1.5 trillion in debt. 80% are funded by the Federal Reserves! This means that foreigners are not willing to buy the US bonds. This means that the Fed printed money and comes in to buy the bonds, artificially creating demand. So the bond price goes higher, and yield drops.

Now, a lot of things are pegged to bond yields. For eg. the Adjustable Rate Mortgages (ARMs). Low bond yields means lower interest payments on the ARMs - for now. But next time, when bond yields start to rise, the ARMs will follow suit. And then more and more defaults start to happen. I'm referring to the commercial real estate ARMs. You can see this in the graphs that I posted 2 posts before this.

So if the Fed buys the bonds, does this means that the US is owing money to itself, like Japan? Unfortunately, no. The US government owes money to the Fed. The Fed is not the US. The Fed is a private entity, whose purpose is to make profits, and with shareholders made up of an elite group of global bankers. Many of them are not even Americans.

So there you have it. The Fed keeping interest rates at ridiculously low levels. Instead of letting the free market set the natural rate, they come in and manipulate it.

Through their action, they can only delay the pain, the inevitable big collapse. And the more they delay it, the greater the pain will be later.

If you have a US bill right now, you don't have to panic or convert it to another currency. Just frame it up and hang it on your wall, and 10 years down the road, show the worthless bill to your kid. Then your kid will really come to understand the devastating effect of inflation.

The REAL numbers behind the headlines. Govt propaganda

I can't watch these videos on Firefox, but they work fine in IE.

For those who love lots of numbers and stats:

For more in-depth explanations:

Random Updates from a friend and Bloomberg: The Phillipines had hired specialists from Barclays and Deutsche Bank to sell off its $1.8 billion (If I remember correctly) US debt. It is a good move on their part. Although they have diminished return, if they had waited longer, those USD will be worth far less.

Well, there're too many news for me to post here. Nevertheless, these are news that are signs of the time. People are realizing that the USD is inherently flawed, and are moving away from it. For decades, the USD has been propped up by worldwide demand because world trade is done in USD. With this movement away from USD causing falling demand, coupled with wayward debts and deficits and printing, the USD can only go down down and down.

If you need good doses of news related to USD and gold, you can visit goldsilver.com

Mortgage Reset Tsunami

The recent crisis in 2007-2008 started when the subprime mortgage rate resets around 2007-2008, as you can see from this chart.

Borrowers initially had lower rates to deal with. However, as the rates increase, more and more people will not be able to repay their debt. The subprime mortgage crisis is just the beginning.

Refer to the chart, look at the other adjustable rate mortgages that are due to reset soon!!!!

The Option ARM, Alt-A and Prime mortgages have yet to reset. When this happens, it will result in higher mortgage payments for millions of Americans. Millions more foreclosures are coming.  

These are mortgages that are not necessarily subprime, but belongs to people who have good credit. The subprime crisis has already pushed the first group of people off the cliff, and the people with good credit are going to be the next victims.With declining home prices, people are going to find it impossible to refinance their debt.

The real estate crisis in America will last for years. The mortgage rates won't even peak until around 2011-2012 as shown by the chart. It is no wonder that people like George Soros recently remarked that the commercial real estate bubble is going to burst next, and he is looking to make some spectacular profits from this.

I cannot imagine what is going to happen. Not only does America need to grapple with these mortgage problems, it is also going to need to deal with a currency crisis.

UPDATE: Another graph here:

 Quotes from a financial times article:

"Sue Troll, credit analyst at T Rowe Price, who in 2006 forecast the subprime meltdown, describes Option ARM mortgages as “subprime on steroids with their underlying quality in many instances having been worse than subprime, despite involving higher quality borrowers”. She says approximately 80 per cent were low- or no-documentation.

Mr Tilson expects resetting Alt-A and Option ARM loans to push default rates even higher, further flooding the housing market, and putting further downward pressure on housing prices."


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