No To Bailouts

And this is how the market is supposed to work... successful companies with a sounder foundation come in and buy up a failed company's assets at fair market price. You don't simply let a failed company restart with a shaky foundation by stealing taxpayers' money to bail it out... That's bad economics and bad morality.

http://www.bloomberg.com/news/2012-12-08/apple-joins-google-in-500-million-plus-bid-for-kodak-patents.html

Nostalgia

I started buying gold 3 years ago when it was still below $1000 an oz. Since then it has gone up to $1730 (today's price). I have most of my money in silver though. 3 years ago it was below $14, and now it is about $34.

Throughout the past 2 years, I have been trying to tell people about the history of monetary systems - not because I want to turn people into investors, but because I believe this is an essential knowledge that people need to have to protect their future generations' or their own savings and wealth. We are in a period of human history where there is massive inflation across the globe, and I expect such an episode to recur again in the future.

I have been trying to convince people that gold/silver is not a bubble. But the cries of a bubble is really big. One day, people are going to look back at $1000 (or $1730) gold and $14 (or $34) silver with nostalgia, and they will not believe that they could have been snapped up at these price levels.

In the interim, I expect prices to fluctuate up or down sharply as more and more short-term speculators come into the gold and silver market. Speculators don't create a trend; they jump onto a trend. This gold and silver bull trend has been going on for about 12 years now, and they will end one day at very high prices. That might be the time to sell then, unless maybe the world got back into some form of gold or silver standard. Till then, it'll be a veryyy patient wait.

The real statesman

watch this obama, if u really want to change america. here's a real statesman who educates people and changes their lives. 

How many people talk of a politician who changed their lives, made them study history, and read books on Mises, Haye

k, Rothbath, Austrian economics, and libertarianism, and voluntarily go to incredible lengths to spread his message? And inspired locals and foreigners alike to come in voluntarily to urge him to run for presidents, and raise funds and campaign for him?

Which politician warned about the real reasons behind terrorist attacks, and predicted the financial crises, and dares to take on the financial and military establishments?

A quick search of "Obama incredible" and "Ron Paul incredible" on youtube shows obvious results on whose supporters really believe in each politician's messages.

Boom and busts in US in the past 2 decades

Jin's report on the previous 2 bubble busts in the US. A good study for those who wants to understand where economic booms and busts come from, and that stimulus and bailouts WILL NOT work. The booms and busts in the past century (not the subject of this short report) show the same patterns which I am presenting below.

Refer to the link for the numbers: http://www.federalreserve.gov/monetarypolicy/openmarket.htm#2008

Here's a summary:

  

Alan Greenspan, the supposed 'great maestro' of the Federal Reserve, printed a bunch of money out of thin air, thereby lowering rates from 8% in july 1990 to as low as 3% in 1992. This started the housing and stock market boom. He tried to increase rates incrementally, up to 6.5% in May 2000. Of course, this pricks the stock market bubble. The stock market fizzled out and culminated in the big bust in 2000-2001. 

To save his buddies and help George Bush, he again printed a whole bunch of money out of thin air, thereby lowering the rate to 1% by June 2003. This whole new bunch of money went into speculations in real estate (although I think its roots can be traced as far back as 1992). The Americans went on a GIANT consumption binge - borrowing, importing and consuming foreign products much more than what the Americans themselves can pay with exports. We saw people buying multiple homes and renovating them, in the hope of selling them to someone else. This wild speculation was further fuelled by the moral hazards of Fannie and Freddie, entities created by the Federal government to encourage home-buying.

Alan greenspan tried to increase interest rates by 0.25% every 3 months, from around early 2004 onwards, reaching 5.25% by June 2006. This action starts to prick the housing bubble. 

After taking over from Greenspan in Feb 2006, and towards the end of 2006, Bernanke should have noticed the real estate bubble about to burst. So he promptly lowered rates. He appeared in the media numerous times to assure everyone that everything is alright. The real estate bubble burst in late 2007-early 2008, although AFTER the bubble had already started to burst, Ben Bernanke was still reassuring everyone that everything is alright. (a video here for your viewing pleasure: http://www.youtube.com/watch?v=9QpD64GUoXw)

To save his buddies and help Obama, Bernanke printed a crazy whole new bunch of money out of thin air, thereby lowering the interest rates to 0-0.25% by late 2008, and had remained at that level till TODAY! He tripled the Fed's balance sheet from $900 million to close to $3 trillion. Expect massive inflation as the magic money works its way into the economy.

We see a pattern of booms and busts here, which is really the creation of the Central Bank. This 0-0.25% rate is ushering in the FINAL and BIGGEST bubble of them all --> the US government bond bubble/the USD currency bubble. Just like how the magic money flowed into the stock market in the 1990s, and how the magic money flowed into the real estate market in the 2000s, this new magic money is flowing into US government bond at a massive amount. The government is borrowing like never before. In 2013 and 2014, they have more than $5 trillion in debt repayment. We should see a big crisis, with investors dumping bonds and the USD. Some other events may happen in the interim which may take people's attention away from the US, but the end result will not change.

When we hear central bankers talk about exit strategies from the stimulus, they are lying. There's no exit strategy without a big collapse. Of course, maybe Bernanke's exit strategy is to exit and flee when his term is up for renewal in jan 2014.

Basel III and gold

Gold to be rated as the so-called tier I capital in Basel III in Jan 2013. Conspiracy theory ??

http://www.meridianca.com/fileadmin/PDFs/TheSecretReturntotheGoldStandard_BrianHicks.pdf

The road system

Insofar as govt wants to monopolize and manage the road systems, will it be better if they build double/triple layers of roads on top of each other and increase road tax, instead of simply charging COE? This way, at least they will be providing more services in return for road users' money, just like how a free-market will do. Or how about layers of cable-car-like structures, with people owning their small personal cable cars (modify them to look nicer)? 

How about opening up the road systems to private enterprises to manage and compete with each other? After all, some countries have this system of private ownership of roads. And back then during the industrial revolution, american private enterprises built water canals that criss-crossed the US for steam-ships, using private funds. The free-market works in transportation too, just like how it works wonderfully in the tech sector, where there's minimal govt intrusion.

Why education costs keep going up

classic. the answer to why education costs keep going up.

Prof says gold is a bubble

nice.. guy secretly recorded prof's and TA's responses to his question. The TA claimed that gold is in a bubble (the wrong part), but yet said that there is not enough gold to go around because the price is too low (the correct part).

It's

 not that there is insufficient gold for world trade. It's that the price is too low for trade. The same is true back then towards the end of the gold standard, when ppl claimed that there isn't enough gold. Unknown to them, it's because the central banks refused to allow their currencies to depreciate vs gold (and hence let gold prices go up) as a result of money-printing, so that there will be 'enough' gold for world trade.

Social Welfare

One of the unintended consequences of the government's interference in the market.

http://www.dailymail.co.uk/news/article-2233221/Dennys-charge-5-Obamacare-surcharge-cut-employee-hours-deal-cost-legislation.html

Ron Paul's farewell speech to Congress

if only obama (and most other politicians) have even 10% the integrity and wisdom of this good statesman on liberty and economics, the world will be a far, far better place.

He's one of the greatest presidents America and the world never had.

The ONLY reason a nation exports, is to import.

Many people today have forgotten what world trade is all about. These are the people who say or write things like "export-driven economy" and "devalue the currency to drive export". They think that you can build a wealthy society using an export model. Well, they're partially right.

You see, export is essentially the same as import. To export is to import. This is what TRADE is about: You send your goods abroad, and get foreign goods in return. When you throw currencies into the mix, it confuses things very very easily.

People think that you can cheapen your currency and therefore sell/export more to the world. They forget the other side of the equation: Your cheaper currency will make imports more costly. They also forget that the other nations can just as easily cheapen their currencies. They also ignore the fact that there is practically no historical evidence that a cheaper currency drives exports.

People think that it is great to build up gigantic trade surpluses by exporting. They forget the fact that you are just merely sending your goods overseas in exchange for PAPER money. It is okay if the paper money doesn't lose value overtime, but in the current central-banking era of human economic history, don't place your hopes on that happening.

You are sending your goods/services/productivity abroad, and what do you get in return? If you spend your export 'money' immediately to import, then that's okay - because the 'money' has not lost value. If you save up your export 'money' for later use, you will get lesser in return. Because the currencies lose value and buy less goods over time.

People also forget that by cheapening your currency (by printing money), you create inflation at home. True, those export companies that you try to help will have more sales overseas. But at what cost? Your people LOSE purchasing power. Prices of goods at home rise. Costs of imports rise. So, when people want to devalue the currency to increase export, this is nothing more than a transfer of wealth from the citizens to those few exporting companies.

I have a hard time explaining to people that you don't want to export just for the sake of exporting or accumulating paper money. You have to import too, either now, or later in the future. But you have to import eventually. Otherwise you are just sending your goods overseas in exchange for NOTHING (ok, you have some pieces of paper money). There's no such thing as perpetual export and no import. That's SELF-IMPOSED slavery. Or that's like sending TRIBUTES to a foreign power. :)

So, in closing, the ONLY reason a nation exports, is to import.

P.S. China is a manufacturing-driven nation, not an export-driven nation. So don't lose sleep over the fact that their exports will go down. They can easily consume what they produce, instead of sending their goods overseas in exchange for paper.

Secession

Jim Rogers once wrote that there is no country in history that has lasted for more than 200 years with the same borders or the same government. 

Will US go down the same road?

"All 50 States Have Active Petitions To Secede From The United States"

http://www.youtube.com/watch?v=LVO6G4fvgiI&feature=g-u-u


"Ron Paul: Secession Is an American Principle"
http://www.youtube.com/watch?v=nhQ31b_dbnM&feature=g-subs-u

"700,000 Americans petition the White House to secede from the US"

http://rt.com/usa/news/petition-white-house-secede-688/

US long-term Bond Bubble

http://www.bloomberg.com/news/2012-11-13/treasuries-see-u-s-over-cliff-as-yields-converge-correct-.html

This is what you call a bubble. Investors think US is in trouble, yet they still do the knee-jerk reaction of fleeing into US bonds, just like in 2008. 

"bond investors are seeking safety from a possible downturn next year."

Well ok, maybe some expect the Fed to ease further and push bond prices up, so they speculate. They know that bonds are not worthy to hold for the long term. In this case, it is clear that they just want to 'flip' bonds, just like how they flip houses prior to the housing bust in 2007/2008.

it's coming

The US has been bankrupt for a few years now, although the general market has not recognised it. Spain, Greece, Portugal, Italy, Ireland have been bankrupt for the few years leading up to their current crisis. The general market was late to recognise it too. These nations are as indebted now (in fact, more) as they were a few years ago. But they were able to buy some time due to the low interest rates in the past. Once rates start to rise, the party is really over. The same calamity will befall the US too.

I doubt that the US can postpone the pain for much longer. The budget numbers are just too horrendous.  Although I don't like to make predictions with regards to timings, if I have to,  we should see a huge crisis hit the US in the next few years. Some other things might happen which will delay the day of reckoning (eg. the world turning its attention to Japanese debt). I think things will ultimately become really bad, and here, I attempt to list down some of the things that will happen in the US:

• A currency crisis
• A government debt crisis
• Rising interest rates
• Fed and government will do "whatever it takes" to support the dollar
• Fed or govt announcing Operation "Who's your Daddy" to support the economy
• A panel of seasoned 'economists' are formed to 'study' the crisis
• Co-ordinated effort by the Fed and financial institutions to purchase US bonds
• Banks lose big on government bonds
• Major bank bankruptcies
• Bailed out financial and auto companies in 2007/2008 fail again
• More money-printing
• More taxes
• More bailouts
• Student loan bubble burst
• Problems in the major and old colleges
• Bankrupt states, municipalities, cities
• Big rise in food and energy prices
• Government imposing price controls
• Price controls result in shortages of goods
• Riots in the streets
• More regulations and laws passed by the government
• More civil liberty lost as the government passes more laws in the name of tackling the crisis
• Gold, silver, platinum, oil, commodities prices soaring
• Wild swings in precious metal prices as speculators get on board
• Dealerships announcing a shortage of gold/silver bullions
• Even more people on food stamps and unemployment benefits
• More immigrations out of the US
• More people renouncing their US citizenship
• Politicians blaming the US crisis on the Chinese "currency manipulation" and the Eurozone crisis
• More capital controls
• More protectionist trade policies
• Possible ban on short-selling as traders get blamed
• Politicians trying to assure the market that things are under control
• World leaders announcing a 'concerted effort' to tackle the crisis
• China and Russia, and more countries hoarding more gold
• US hostilities with Iran deteriorate
• More countries trading using their own currencies, bypassing the USD
• Stock market may go up, down or sideways in terms of USD - but it will plunge in terms of gold/silver
• Stock exchanges closed to cool the market down
• More calls to use the SDR

And maybe further down the road,

• A ban on gold exports
• Issuance of a new US dollar

Warren Buffett's networth in other commodities

Ok, so some people are convinced that gold is in a bubble and therefore it is not a good measure of inflation/depreciation of currencies/networth, etc. 

Fair enough. I've compiled (it sure takes quite some time to do this) WB's networth in other commodities. The chart shows his purchasing power over the past 12 years. The number of tons of rice, barrels of oil, pounds of beef, pounds of sugar, and troy ounce of silver (I included silver just for kicks) he can buy. Again, we see that his networth has been greatly diminished in the past 12 years since the start of the commodities bull-run in 2000.

Note: This is not an attempt to bash WB. Just want to show the fact that inflation is rampant, and is going to get worse. Even a legend like him finds it hard to keep up with inflation. So, stocks generally is not a place to hide from inflation to the average investors.

P.S. maybe to make things simpler, I should just compare his networth against a commodities index.

Check out my other post on Warren Buffett's wealth in terms of gold:

http://silvernjin.blogspot.sg/2012/10/warren-buffet-wrong-on-gold-wiped-by_16.html

Warren Buffett - Wrong on Gold, Wiped by Inflation

Are the rich really getting richer, or are they being wiped out by inflation too?

I estimate the wealth of one of the most well-know figures in the investment world: 

Warren Buffett. You will see that although his wealth in terms of dollars have increased/remained constant in the past 12 yrs, the wealth in terms of gold has really been decimated. Wonder why he hates gold and still publicly bashes gold.

Year | Worth in Dollars | Worth in Gold
2000, $26b, 92m oz
2001, $32b, 119m oz
2002, $35b, 113m oz
2003, $31b, 84m oz
2004, $43b, 105m oz
2005, $44b, 99m oz
2006, $42b, 67m oz
2007, $52b, 74m oz
2008, $62b, 73m oz
2009, $37b, 38m oz
2010, $47b, 35m oz
2011, $50b, 32m oz
2012, $44b, 26m oz

If one can beat his stock-picking skills in the past 12 years, and accumulate wealth 400% faster than him (to equal gold's rise), by all means go ahead. But for most of us who can't, gold is protection. It will be even more interesting to see his wealth priced in silver.

Check out my other post on Warren Buffett's wealth in terms of other commodities:
http://silvernjin.blogspot.sg/2012/10/blog-post.html

Bailouts

What most analysts miss about bailouts. 
Bailouts:

1. Necessitate inflation and steal wealth, due to money-printing. Everyone loses purchasing power.
2. Divert resources from the more productive parts of the economy into the unproductive parts.

3. Destroy jobs that would have been created in the more productive parts of the economy, had resources not been diverted to prop up unproductive jobs.
4. Prevent prudent businesses from gaining market shares. Instead, they are taxed so that the bailed-out companies maintain their positions in the market.
5. Deny prudent businesses the chance to snap up failed companies' assets, so that the economy can restart on a sounder footing.
6. Stifle competitive growth in the bailed-out sector.
7. Force taxpayers to buy up failed companies' assets at greatly inflated prices.
8. Allow government to grow bigger, imposing more rules and regulations.

Bailouts = bad economics + bad morality

Excellent 30-mins lecture! Answering the Same Old Arguments Against Sound Money | Thomas E. Woods, Jr.

Ballooning Debt Obligations

I've compiled the debt obligations for the US in the past 14 years using 'official' numbers (off-balance-sheet figures are far worse). The spreadsheet shows, at the end of each year, the debt outstanding for the following year. Debt obligations due in 2013 is not fully compiled yet. Only debt accumulated up till Aug 2012 is shown.

Notable World "reserve" currencies:

Currencies that circulate outside its issuer's borders:

5th century BC: Athenian drachma (silver)
1st century BC - 4th century AD: Roman aureus and denarius (gold and silver)
4th - 12th century: Byzantium solidus (gold)

13th - 15th Century: Florence fiorino (gold)
17th - 18th Century: Netherlands gulden (gold)
18th - 19th Century: Spanish peso de a ocho (silver)
19th - 20th Century: British pounds (gold to fiat)
20th - 21st (highly likely) Century: US dollar (gold to fiat)
21st - ?? Century: Chinese RMB?? (fiat to gold/silver ???) --(or some form of a world currency, eg. IMF's SDR)

Modern PhD vs ancient Kings

Think modern central bankers and economists and PhDs are better managers of our money than their counterparts who lived 2000 yrs ago? Think again. I have compiled a few examples. It's difficult to get data from ancient times but what I got so far is striking. 

(rough estimates of currency value vs real goods):
US Fed -> 1913-2011 (abt 100 yrs). The USD has lost over 95% of its value 
Singapore MAS -> 1970-2011 (abt 40 yrs). The SGD has lost over 90% of its value 

UK BOE - 1900-2011 (abt 100 yrs). The GBP has lost over 98% of its value
Swiss SNB - 1945-2011 (abt 60 yrs). The Swiss franc has lost over 65% of its value

Info on ancient price systems are hard to find, but here're 2 of them:

Roman Republic - 3rd century BC-1st century BC (over 200 yrs). The Silver Denarius maintained 100% of its value.
Byzantine Empire - AD 498 - AD 1030 (over 500 years!). The Gold Solidus maintained 100% of its value.

Of course, eventually, these currencies also failed, for the same reasons as all currencies after that: Debasement.

In our modern world, it's called Money-printing (or more euphemistically - "Quantitative Easing", "Operation Twist", "Lowering the interest rate", "Currency devaluation to help exports", etc). Why debase money? Politicians over-promised and overspent (along with other reasons due to the intricacies of the modern monetary system).

The Education Bubble

When will the US higher-education bubble burst? I wish there is a way to short-sell the education bubble. Is there a way to short the colleges? Or maybe a way to short Sallie Mae?

The students have more than $1 trillion in debt. Several well-known institutions have bad balance sheets - Harvard, Princeton, Stanford. Their financial woes are compounded by inflation, pensions and bad bets in the financial market. They are likely to go bankrupt, and maybe get bailed out. Even their absurdly high tuition fees are not going to help.

And talking about tuition fees, even sub-standard colleges charge absurd tuition fees. How is this possible? 

One of the main reasons is Govt-guaranteed student loans. When the politicians started politicising education a few decades ago, with their 'no-child-left-behind' mantra, that's when education costs really went up. It used to be that people can work summer or part-time jobs and pay for their tuition fees. But today, this is impossible.  Absent these student loans, tuition fees would have been very low. Colleges will be forced to slash costs and compete with each other based on costs. But because of these government-backed loans, colleges simply jack up tuition fees year after year.

In Singapore, we see similar things happening. I was rather appalled when I go back to NUS from time to time to see the kind of renovations that they've put up to make it all look nice and dandy. All these while, the tuition fees have been increasing. I'm lucky that I wasn't employed into NUS' fundraising department a few years back. I think one of the interviewer was visibly annoyed when I attacked the banking system, and that could have cost me the interview.

With today's technology, education should be very cheap. It is now so much more easier to learn compared to just a few decades ago. Information is so freely available on the internet. But guess what, governments force us to attend their public schools, paid for by taxpayer money, and force their one-size-fits-all education program down our throats.

From my experience as a private tutor, I see more and more students getting desperate. More and more students complaining to me that the lessons in school are sub-standard and don't interest them.

When I look around at university programs, we're made to take courses that don't matter to our studies. A lot of undergraduates try to take courses that require minimal effort. A lot of undergraduates do enough just to get by. We are kind of forced to pay so much money for it, but the services are bad. All those money goes into fancy buildings and projects. Under a free-market education system, this kind of problem will not be so widespread! Without government monopoly rules, colleges will spring up everywhere and compete for students. There will be colleges specialising in different fields. Students will be studying what they really love, and take courses that really matter to them.

Oh, Warren Buffett

Finally finished the hefty 710-pages biography of Warren Buffett. Didn't quite like him at first but I thought it would be good to read up about him. A great personality with great passion, drive and focus. One can only dream to be 10% as hard-working as he is. I gained more respect for him as a person after reading the book. However, it's unfortunate that his calls for the 2008 $700 billion bailout of failed financial firms and his distaste towards gold will be his biggest mistakes in the later part of his life. The worst thing is that many people who look up to him will be affected following these 2 advices. I've seen videos of congressmen quoting him so that they can push their bailout and spending agendas. It's not easy to have such great power I guess.

If competition in currency is allowed

This is a topic which I've talked about before, but I would like to put it on record.

We are born into a world of fiat money, a world where governments or the central banks have complete monopoly over the nation's money. The IMF prohibits member nations from backing their currencies with gold. We are forced to use these paper money because governments declared it to be 'legal tender'. Court settlements, fines, and taxes can only be settled in these monopoly money. Taxes are slapped on other monetary alternatives such as gold or silver. These leave people with little choice but to use the monopoly money.

What if we can repeal this legal tender law? What if competition in currency is actually allowed?

In Singapore, banks like UOB, DBS, OCBC, Maybank, etc etc will start issuing their own notes. They may come up with something like "UOB Dollar", "Maybank Ringgit", or whatnot. To instil public confidence in their currencies, they may back it with something tangible, such as precious metals.

In light of the rampant fiat monetary inflation around the world today, I - after doing some due diligence - will be among the first to convert some of my money into these notes. I will then post on FB: "I've put my savings in UOB Dollar, and it's backed by gold. Have you?"

I imagine some people will start to do the same. Pretty soon, people will flock into these bank notes. If this happens across the world, we will see many national currencies self-destruct, because they are backed by nothing but its government's promise to maintain its value, and because they are printing them at record rates.

MYTH: "There is not enough gold for world trade"

A $100 reward for anyone who can dispel the logic in this article.

I've heard this argument time and again: There is not enough gold in the world for trade. So, I would attempt to show why this is not the case in one single post, in the hope that I do not have to repeat myself again :)

I start with an excellent quote by James Rickards from his book "Currency Wars: The Making of The Next Global Crisis":

"Statements like this illustrate one of the great misunderstandings about the role of gold. It is misguided to say that there is not enough gold to support world trade, because quantity is never the issue; rather, the issue is one of price. If there was inadequate gold at $35 per ounce, the same amount of gold will easily support world trade at $100 per ounce or higher... If the price of gold was too low, the problem was not a shortage of gold but an excess of paper money in relation to gold."

I'll try to explain:

James Rickards said this statement in the context of the 1960s, when the popular notion was that there wasn't enough gold for world trade, and when gold was still artificially priced lowly at $35 per oz. The government had printed too much USD paper money, and was unwilling to adjust the price of gold upwards in reflection of this new supply of paper. As a result of this monetary inflation, prices of goods soared, and naturally, trade priced in terms of dollars went up too. When people take a high world trade volume (priced in terms of USD) and compare it with the $35/oz gold, the natural instinct is to think that there wasn't enough gold to support the trades. If the government had been honest and devalued the USD relative to gold, the price of gold would have soared, and people would have realised that the quantity of gold is not the issue.

Even if the amount of gold in the world today is cut by half, there will still be more than enough gold. With the advance in measurement and digital technologies, we can even measure the amount of gold using 'atoms of gold' rather than 'oz of gold'. There is more than enough gold!

Is there the other side of the coin on this issue? Well, as always, there is. The kicker is that the 'there-is-not-enough-gold' crowd will be right -- IF, say, an alien came to earth and stole all the gold, and left us with only 1000 atoms of gold. In that scenario, yes, there will not be enough gold to go around for world trade.

Even so, even if we take all the gold away from the world, and all the paper money away, trade will still go on. There may be some short term consequences, but the market will find a new form of money to use, if the government does not interfere in this natural process.

One must remember that money is a means, not an end. It is a medium of exchange, which we use to exchange all our real goods with each other. It's the exchange of real goods. It's not about export vs import, or buy vs sell. Export is essentially the same as import. To export is to import. To buy is to sell. The only reason why a nation exports is to import. Think in terms of 'exchanging goods' rather than 'export/import'!

Creating more unites of a medium of exchange (money) only stimulates price inflation.

Fed to disappear?

At the rate they are going, the Fed is going to disappear within the next decade... They will then become the 3rd Central Bank to disappear in US history.

QE3 is officially here

And so, QE3 has been announced officially. $40billion a month. Doesn't mean much though. Those who have done their research knows that the Fed has been printing all this while, regardless of whether they announce QE3 or not.

Back in 2010 I posted about how QE2 was another nail in their coffin. I don't know how many more nails need to go into securing the coffin, but I guess it won't be long now. QE3 is open-ended, meaning it will last till as and when the Fed pleases. They have also announced that they will keep rates low till 2015. This can only be done by money-printing. I await 2013 and 2014 with anticipation. The US has to repay tons of debt in the coming months. I wonder how they are going to do that.

Less than 3 weeks ago, I started longing gold on forex, in anticipation of this announcement. I don't like to do short-term trading, but I might as well do it since the price is going up. Although traders will say that the market has 'priced in' this announcement in the weeks leading up to today, I doubt that they 'priced in' the fact that the Fed will keep on printing indefinitely. I think we will see more traders coming into the gold market again because they did not anticipate that QE3 will be 'open-ended'.

While some of us are having fun here, this is very sad news for the US citizens. The Fed's actions over the past few decades have destroyed the saving class. As always in history, this is how an empire ends.

Inflation

In a free society, jobs are abundant, contrary to the belief that jobs are scarce. According to MOM, as of March 2012, there are 46800 job vacancies in Singapore. The problem is that most people don't want these jobs, because they are 'low-paying'. A more accurate description would be 'these jobs give low-purchasing power'. Why is that? Money-printing (inflation) is why.

I have my own index, called the kopi-index (rough-estimates). In 1970s, a fresh-grad can probably earn about $1400. A cup of kopi costs $0.20, so one's salary gives a purchasing power for 7,000 cups of kopi.

Today, a fresh-grad earns about $3k (looks like a 4x increase from the 1970s! Good!). A cup of kopi costs $1. One's salary gives a purchasing power for 3,000 cups of kopi.

Feeling wealthier?

Purchasing power has been diminished greatly by money-printing.
Inflation gives the illusion of wealth. This is the real and most significant reason behind the growth in the rich-poor gap (it's not caused by greedy businessmen), the widespread phenomenon of the dual-income family, and low birthrates.


Our grandparents talk about how prices keep rising over the past few decades. Their grandparents, however, would have talked about how prices kept falling in their era (during the gold standard).

Moral of the story: protect yourself!

Original Meaning of Inflation

http://www.minyanville.com/businessmarkets/articles/6/6/2007/id/13019

The above link leads to a nice site which explains the original meaning of inflation, something which I have been trying to tell people for a few years.

Inflation used to give a cause-based perception of rising prices. Inflation used to mean simply the increase in the supply of money. Rising prices is a direct cause of increasing the money supply. Now, inflation has evolved to give a effect-based perception of rising prices. People think that rising prices is caused by other factors, while forgetting that rising prices is the effect of money-printing! People think that because there is economic growth, somehow it is accompanied by rising prices. Where's the link? Think more!

Inflation has confused the public of cause and effect of general price increases we see everyday.

It is a tool used by central bankers and politicians to steal wealth away from the population. It is a tool which allows politicians (and public alike) to blame price-increases on foreigners, bad weather, evil speculators, and greedy CEOs. And most unfortunately, it is a tool which allows people to wrongly blame the free-market for the economic problems we see around the world today.

2012 Maturing Debt

Part of US' debt maturing in the next 4 months. Total $506 Billion, 1/4 of their annual tax revenue, according to my data collected in June. (and that's with the current artificially low interest rates)

Trading

Nowadays everyone (well, at least those whom I know on Facebook or other sites) is trading on the market, be it in stocks, derivatives or currencies, even though these markets have been going down in real terms for the past 12 years. Well, I guess the macro trend doesn't matter as much to traders.

Traders use a lot of technical analysis - charts to be specific. Charts show the action of the market in the past, and traders attempt to observe these trends and apply it in the short-term. When I tell people: "Ah, but you can't even predict what your best friend - one single person - will do in the short term. How would you expect it to work out for a large number of people?" So far I have not gotten a satisfactory answer. It seems to me that traders agree with my statement, but somehow because the charts show the psychology and actions of a large crowd of market participants, therefore it gives some reliability in the measurement of future market actions. The Law of Large Numbers, so to speak.

Casinos also work on the Law of Large Numbers, and they are doing pretty well. But I think there is a fundamental difference here. The law of large numbers work in the favour of casinos because they know the probability of winning or losing each game. They just need to make sure that the probability of a house win is large enough, and then let the law of large numbers play out by itself.

Technical analysis, on the other hand, have no such luxury. Going back to the you-can't-even-predict-what-your-best-friend-will-do example, when you try to extrapolate this error into large numbers, the errors will seem to be pretty massive. If you don't know the probability of what particular action a particular individual will make, how will the law of large numbers work in your favour?

But maybe since most people are using this sort of extrapolation, on a relative basis, they may all 'even' out. It's like a negative and a negative making a positive. Is there such a thing? It's too complicated for my brain to comprehend this. So  as of now, I will stay out trading. :)

Questions on US economic crisis

A friend happened to ask about the economic crisis, and I replied with a lengthly write-up. I guess I'll just put it here for those who want to read. Don't want to let it rot in the 'sent' folder. Note: I typed these off the top of my head and has done very little editing.

Question:

 My main objective is to write an article to explain why the US is in the current situation it is in. Starting with the subprime crisis and then going through the details of how the monetary policies were implemented and why we don’t see the results . I’m sure there are other reasons that could explain why the policies aren’t working, but I think I’m supposed to just talk about the possible liquidity trap scenario

1.       The question I  have is that I want to know how the liquidity trap in the US can be used to explain why the US’  s monetary policies are not working. I also want to know what the purpose of QE is. I know its for printing money and for the government to use the money to buy long term 30 year bonds but  I don’t know why they are buying the thirty year bonds and how that plan was supposed to stimulate the economy in the first place.

2.       Based on monetarists theory I’m using the the MV=PY equation. I don’t know how to find the velocity . cause I think if out put is not moving, money supply is increasing and inflation is growing, then V is either stationary or decreasing. How can I prove this ?

3.       Then I also want to understand how a steep yield curve in the bond market is bad for housing markets.. my lecturer made a brief statement on it but I wasn’t sure of what he means

Answer:

I'm not well-versed with the economics equations, but I'll offer my thoughts if you would like to indulge me. 

1. The problem (which most economists and Obama wrongly diagnosed) with the economy was and is not about a lack of credit or liquidity. There are several dimensions to this economic problem, which I will attempt to discuss below:

The problem was that there was too much of those in the first place. In the 1990s, the Fed printed lots of money, which results in the dot.com bubble. The bubble burst around the year 2000. President Bush inherited this bubble from Clinton, and wanted to 'solve' it.  With the help of the then Fed-chairman Alan Greenspan, a lot of money was printed and flooded into the economy. The result was a drop of interest rate to 1%, a few companies were saved, the housing sector picked up, and the nation never really suffered a recession. Bush prided himself with his achievement in stopping the crisis, and blamed the free-market on the bubble. Little did he know that this money printing had led to increased speculation in other areas of the economy, namely the housing sector. People borrowed money because it was so cheap. They undertook projects that would otherwise have not been started under free-market conditions. They built homes all over the place. The Americans, flooded with this magic money, went on the biggest spending binge in history. Housing sales went up, motor sales went up, imports went up, and savings went down. It used to be that one works hard and save for a house. Now the situation has turned into one in which if you lose your job, you just go and buy a vacation house, because you expect the price to go up.

The government also came in with various programs to help the people own homes, even those with bad credit-ratings. They set up Fannie Mae and Freddie Mac to guarantee mortgages. Together with the deposit-insurance scheme which the govt had come up with to protect customers' deposits in the banks (same as those in Singapore), these 2 entities create a huge moral hazard in the financial sector. Banks do not care what they do with depositors' money, because they have the govt on their back. Depositors do not care what the banks do with their money, because they have the govt on their back. 

The market is greedy, but greed is supposed to be countered with fear and competition. With all these guarantees by the govt, the fear and competition was effectively REMOVED. Banks do not compete based on the soundless of their deposits anymore! Worse is that depositors do not care too. Think about it, an average person will spend more time researching on a cell phone that he/she is planning to buy, compared to spending time researching on a bank in which he/she wants to deposit his/her money. This is bad bad moral hazard!

So anyway, the economy looks to be booming at a dizzying pace. Greenspan, noticing this economic 'growth' (an illusion created by money-printing, really), slowed down his money-printing in the ensuing years. As a result, interest rates start to rise. Businesses which had depended on the preceding artificially low interest rates started to fold. Home loans start to go bad because people were unable to service the higher interest rates. So in 2007, we have the bursting of the housing bubble.

Obama and Bernanke inherited this bubble, and what do they do? Repeat the mistake! They printed even more money (thus lowering interest rates to 0%) and spent even more on government programs. They encouraged Americans to spend on new houses, and reward them with rebates if they buy a new house. They encouraged Americans to trade in their used but fully-paid cars for a new car, and gave $3000 incentive for anyone who does that. They destroyed the engines of the old cars (you can watch all this madness on youtube) and loaded Americans with new debt because they bought new cars. 

To your point on the purpose of QE, they did that precisely to lower the interest rates to "save" the banks and companies dependent on it, and to allow the government to spend more and service its debt. It's madness. It's mathematically impossible for the Fed to stop printing and expect no economic collapse. There's always a consequence. If the Fed stops printing, the interest rates will rise again and the banks and the govt will be bankrupt again (i have figures to back these up). Anyway the bubble they have built up now is the govt bond bubble. Now there's a mania in the US govt bond, but most people still haven't realised that. 

So, to summarise, QE won't stimulate the economy. The only thing that it will stimulate is the price of gold. LoL. We can discuss the simple mathematics on why QE doesn't work at all if you want to. People have to stop worshipping paper money and stop thinking that it is real money just because the govt says it is legal tender. I treat paper money as just another commodity which people just happens to have faith in (albeit wrongly) right now. It is a commodity which has been created in massive quantities in the past 40 years ever since the dollar was de-linked from gold in 1971. 

2. Sorry, i'm not familiar with the equation, so I can't answer it quantitatively. But correct me if I'm wrong: you're saying that M rises, P rises, and Y is unchanged? I would think Y is dropping though. I think they measured Y by considering growth of GDP and amount of inflation. So in my mind it's not accurate. GDP can be bumped up simply by printing more money and more govt-spending. Inflation is very obviously understated by official numbers (the real statistics can be found at shadowstats.com, but we have to subscribe to see it).  

Qualitatively, I think right now, the money-velocity is not high yet. There's still faith in the USD around the world, although some countries are increasingly moving away from USD. When people start to spend all those USD, when China starts to spend all their USD, then the chickens will come home to roost in the US. Inflation will be sky-high. What the US had printed up in monetary base in the past 200 years (and have a resulting 97% loss in the purchasing power of the USD), Bernanke managed to double it in just 1-2 years. It's incredible.

3. The yield curve shows the interest rates that the govt has to pay for its debt. I'm not sure what your lecturer said, but I know of 2 reasons:

- When yield curve becomes steep, many of the floating-interest-rate loans will become harder to service. A lot of bank loans' interest rates are tied to the govt bond yield. So as the yield rises, so will the interest rate on the loans. This means more people will default on their mortgages. This was what happened in the years leading up to 2007.

- I think the housing market has been dependent on government-entities like Fannie and Freddie to stay afloat artificially (they now own over 60% of all US junk housing mortgages, and buys up 90% of new mortgages). I think they have liabilities in the trillions. I have not done much research on the figures, but I see quotes saying that Fannie and Freddie adds like $5 trillion to the national debt (of course, this is off-budget and not reported by the govt's phony, unscrupulous accounting methods). When the yield curve is steep, the govt will no longer be able to spend as much on these entities to support the housing market. So they may have to release millions of homes into the market, and prices will collapse. 

I don't agree that a steep yield curve bad for housing though. It's good for housing actually. Prices need to go down to its natural level, and not stay at one induced by the Fed's money-printing and govt's artificial support. Home builders need to go bankrupt, because they are using the nation's scarce savings and resources on projects that are unsustainable. Under a free-market condition, interest rates would have risen dramatically and said STOP to these home builders. Capital will then be more efficiently allocated to more productive parts of the economy.

Purchasing power of fiat vs gold

it's dangerous to have too much faith in paper money...compare gold's purchasing power to fiat paper money in the past 100 yrs:

The money-printing central bank's great (sarcasm) record in promoting economic stability brings about very few recessions in the 20th century:

1918-1919, 1920-1921, 1923-1924, 1926-1927, 1929-1933, 1937-1938, 1945, 1948-1949, 1953-1954, 1947-1958, 1960-1961, 1969-1970, 1973-1975, 1980, 1981-1982, 1990-1991, 2001, 2007, 2012-2014 (my projection)

Don't worship paper money, don't have blind faith in paper money!

Don't worship paper money, don't have blind faith in paper money, or you will lose a ton of purchasing power. History has shown this to be the case time after time!

Economists and TV commentators keep saying that when there's a global economic slowdown, precious metals prices will go down. I don't know whether the second part of their statement is true in the short-run, but in the long-run, it is definitely wrong.

The more important question is: Slowdown of what relative to what?

If car producers have a slowdown in demand relative to fish producers, it may mean you can use less fish to buy more cars, because fish has become more valuable relative to cars. So the fish producers gain purchasing power relative to car producers. The car producers lose purchasing power relative to fish producers.

Even IF globally, there's a meltdown in prices - stocks, housing, agriculture, precious metals, etc - I still think precious metals (and agriculture) will gain in purchasing power relative to other things. The fundamentals for this is so strong.

If there is a collapse in global supply of real goods, real goods will gain in purchasing power relative to paper money (therefore, goods prices in terms of paper money goes up).

If there is a collapse in global demand of real goods, real goods will still gain in purchasing power relative to paper money, because so much has been printed in the past few years. And politicians and central banks are going to print even more during crisis.

It has always been about the transfer of purchasing power (or wealth) from one place to another. If people REALLY understood this principle and how it works, Keynesianism would have been extinct a long time ago. Yet, the majority of the people on the globe still have Keynesian ideas. Whether they identify themselves as a Keynesian or not is immaterial.

A pause

My blog may sound anti-government and anti-US. But it really is not. What I wish for is limited government, libertarianism, and free-market capitalism. Unfortunately we don't have all those in the modern age. The US just happens to be the best example that I can use, because they became powerful based on the principles of libertarianism and free-markets. However, today they're totally opposite of what they used to stand for.

Sugar Delight

Some Sugary Appetiser to share (I may post a Sugary Main Course full of demand and supply data):

Sugar
Historical high: 65.2 Cents/lb in November of 1974
Inflation-adjusted high using govt-manipulated inflation figures: $2.91/lb
Inflation-adjusted high using private sources of inflation figures: > $6/lb

Today's price: About 21 Cents/lb

1974 Gold:Sugar ratio = $100 : $0.65
Today's ratio = $1600 : $0.21
If 1974's ratio is achieved again = $1600 : $9.92

Minimum government and maximum freedom

100 yrs ago, US became the richest and most powerful nation history has ever known. They achieved it based on: Minimum government and maximum freedom. People flocked there and lived the "American Dream", because it is the land of free people. They can produce and save and retire.

Before the creation of the Federal Reserve central bank, there were no Federal government taxes, no department of education, no department of energy, no healthcare involvement, no medicare, medicaid, social security, and of course, people were able to produce and save, because they were on a gold standard and their savings grow in value over time. They had 200 yrs of sustained fall in prices of goods and services.

Today US is the opposite.
Money-printing by the Fed (this is not capitalism!) enables the government to grow so huge and be involved in so many things - education, healthcare, wars, bailouts, banking, food, etc
Money-printing causes inflation, and hard-working people's savings lose value.
Money-printing drives interest rates down, and no one is able to save. So they borrow and borrow and consume and consume. Everyone becomes a speculator and buy stocks/forex in order to get more money.

Now they're deeply indebted, and a crisis is coming very soon, maybe towards the end of this year, or next year. The timing, I can't be sure. But it'll be a currency/debt crisis. The end-result is a 100% certainty. It's just a matter of time.

Liberty

For those who are not pleased with taxes and CPF:

Is the foundation of civilisation peace and free exchange and voluntary interaction of individuals, or is the foundation of civilisation -as the state would have it- the gun, the badge and the hangman? The state has warped our moral sense, and taught us that looting and aggression are okay, as long as they're done by majority vote. It has turned us against each other. It has taken natural harmonies and replace them with disharmonies. - Tom Woods


What we are really faced with in society is not a conflict of rich vs poor, or white vs black, or city vs country, or industry vs agriculture - but all of us against the parasites who live off our labour, and train us to believe that there is no other way to live. There is anohter way to live, and it's called liberty. Join us.
- Murray rothbath:

Fiat money creates big govt.

The data show that Govt (and of course, economic problems) grows enormously ever since the creation of Fed (the current US central bank and the 3rd central bank of US. The first 2 failed).

(All figures in billions)
Year 1800 --- GDP $0.476 --- Govt size $0.01 --- govt size as % of GDP 2.1%
Year 1850 --- GDP $2.556 --- Govt size $0.04 --- govt size as % of GDP 1.6%
Year 1910 (3 yrs before Fed was created) --- GDP $33.423 --- Govt size $0.84 --- govt size as % of GDP 2.5%
Year 1950 --- GDP 293.7 --- Govt size $44.80 --- govt size as % of GDP 15%
Year 2000 --- GDP $9951.5 --- Govt Size $1788.95 --- govt size as % of GDP 18%
Year 2010 --- GDP $14526.5 --- Govt size $3091.34 --- govt size as % of GDP 21%

These are according to official govt figures... the most recent 2 decades of which have been heavily manipulated. Some really big things are being hidden from their balance sheet. So the actual figures for 2000-2010 are actually far worse than is shown here

Is big government the answer?

We've been born into a world of big governments, and they are in control of many things. So much so that we have been conditioned to think that without them, a lot of "big" economic projects will never happen. Below are some examples of how the free market benefited the people tremendously, back at the time when government was very small and there were LESS regulations on the market:

Cornelius Vanderbilt offered steamboat services and reduced prices from $3 to $0.10. In some trips, he let people ride for free, but hope to make some money selling food on board to them. He used his rail-road company to deliver mail, and compete with another government-subsidized rail company. He did this at a quarter of the price, and kicked the subsidized company out of business.

Andrew Carnegie single-handedly reduced the price of steel from $160 a tonne to $17 a tonne.

John D. Rockefeller dropped the price of kerosene from $1 to $0.10.

Are we supposed to hate these rich people, because we were told that they sit on the world's wealth? Of course, those who got rich lobbying a powerful government for a share of the power ought to be condemned. But the problem is powerful government itself, not greedy businessmen. Without power, no one will be lobbying for it. Businessmen increases people's standards of living. Big government destroys wealth.