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.

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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.