Monday, November 3, 2008

Enemy Of The State

Listening to a Jim Rodgers interview today I came away with this dose of wisdom concerning a "search for the bottom" in commodities:

When things go up on bad news, that is a classic sign a bottom is in. When things continue down on good news, the bottom is not yet in.

Two interest rate cuts last month by the Fed have failed to stifle the Dollar and lift Gold higher. Rate cuts have always been Gold positive in the past. The fact that Gold has failed to respond to this "good news" suggests the wait for a bottom in Gold may persist for a while longer. Manufacturing last month dropped to its lowest level since 1982. This "good news" should have knocked the Dollar off it's pedestal and given a boost to Gold. No, the Dollar went up again today and Gold slipped hard from it's overnight highs in Asia.

It escapes me that the "threat" of interest rate cuts by the ECB later this week can weaken the Euro, yet a full 100 point cut in the Dollar has almost no effect on the pathetic US Dollar. Even if the ECB cuts 50 points, they would still maintain a large rate differential advantage [3.25 to 1.0] over the US. I thought investors parked their cash where they could get the best return on their money? Oh, that's right, I forgot it is 1984. Down is up, and up is down. My mistake, I ask your forgiveness.

Maybe what Gold needs is some really "ugly news". Geeze, what could be uglier than President Obama? His wife? LOL! How 'bout a currency crisis in an emerging market? Now that might set a fire under Gold.

It's obvious Gold is searching for a bottom here, as is Oil, Silver, and a host of other commodities. But unless or until the Dollar gets whacked, we'll have to continue wandering around in the dark.

Gold and Economic Freedom
by Alan Greenspan[written in 1966]

This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand's Capitalism: The Unknown Ideal

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

I guess that commentary pretty much sums up Big Governments hatred of Gold. The shocking part of the whole piece is that the author is Alan Greenspan. And you wonder why Gold has become next to impossible to find and purchase in the face of this monetary crisis. The US Dollar is the pillar of the Welfare State. I doubt Mr. Obama is going to be in any rush to "change" a damn thing.

You Better Be Afraid
The credit markets are an international mess. Unless central and domestic banks begin lending in earnest, cash and credit are frozen in time and nothing moves. For now, banks receiving tons of new borrowed cash from central banks are holding it in fear and not lending. Banks do not trust each other.

American housing will continue to fall down for the next three years. We see no bottom until 2011-2012. This is a primary engine of US growth and for now its dead and getting deader.
As commercial real estate falls down the slippery-slope, pension funds and insurance companies are feeling real pain as they own this stuff for income.

The Sheeple are fooled as our wonderful U.S. Dollar had a recent rebound. Nothing has changed and it will sell much lower due to piles of bad debts, inflation, and dilution. Somewhere soon, the dollar slides under .5000 to about .4500-.4600 and then supports. Theoretically, it should go to zero but being the world’s reserve currency with mammoth inflation ahead, support is expected.
Japan, who never got out of their mess after 1989 is working hard to save it’s economy and that of the US. We give them credit for taking on the Herculean task of trying to repair the Unites States.

Corporations seeing how easy it was for bad-boy banks to extract billions from our government in a quest to subvert ‘too big to fail positions’ are jumping in line for their share, too. General Motors on the brink of bankruptcy will probably get Chrysler’s Jeep and Van operations, then flush the rest. They’ll borrow lots of new billions from Uncle Sam under the phony guise of using the cash for R&D on green vehicles. That’s a lot of crap. They are broke and need the cash to live on for a few more months. The big three auto companies wrecked their businesses and now want the taxpayer to save their butts. Further, GM wants Chrysler’s $11 billion in cash, which they would burn through in 11 months at current rates.

The government’s lending window is open to every jerkwater corporate failure from nonsensical operations to formerly blue-chip, now broke major companies.

Consumers were the former backbone of the American economy. Now they have experienced major home value losses, cannot borrow on their homes any more, and their share portfolios are decimated. Credit is gone and jobs are fleeing with lost credit. Social ills of this legendary mess will be terrible; crime, divorce, lost homes, no college, no insurance, etc, etc.

Automobile and credit card defaults are the next tragedy becoming more visible in the first and second quarter of 2009. Unemployment in Michigan is nearing +20% (official number is +8%) and nationally, the real number is above +15%. We think Michigan will hit the magic 1930’s depression 25% unemployed (for real, not newspaper numbers) in 2009. The auto industry and its highly paid jobs are toast.

Paulson's Swindle Revealed
The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.

These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them. Open an immediate Congressional investigation into how Paulson and his staff determined such a sweetheart deal for leading players in the financial sector and for their own former employer. Paulson's bailout staff is heavily populated with Goldman Sachs veterans and individuals from other Wall Street firms. Yet we do not know whether these financiers have fully divested their own Wall Street holdings. Were they perhaps enriching themselves as they engineered this generous distribution of public wealth to embattled private banks and their shareholders?

Effectiveness of AIG's $143 Billion Rescue Questioned
A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant American International Group may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing.

The Treasury Department leapt to keep AIG from going bankrupt on Sept. 16, and in the past seven weeks, AIG has drawn down $90 billion in federal bailout loans. But some key AIG players argue that bankruptcy would have offered more structure and greater protections during a time of intense market volatility.

Echoing some other experts, Ann Rutledge, a credit derivatives expert and founding principal of R&R Consulting, said she is not sure how badly the financial system would have been rocked if the government had let AIG file for bankruptcy protection. But she fears that the government is papering over the problem with a quick fix that was not well planned.

"What we see now are a lot of games by the government to keep these institutions going with a lot of cash," she said. "This is to fill holes in companies' balance sheets, and they're trying to hold at bay the charges that our financial system is insolvent."

The deal that the Treasury and the Federal Reserve Bank of New York pressed upon AIG was intended to stop any domino effect of financial institutions falling because of their business ties to AIG. The rescue allowed AIG to provide cash to huge banks and other players who had invested in rapidly souring mortgages insured by the company.

Early this year, investors had begun privately demanding that AIG pay off its billion-dollar guarantees. But in mid-September, when the demands for cash reached a public crescendo, AIG had to admit that it didn't have enough cash on hand to meet the obligations.

In the first weeks of its federal rescue, AIG has used the loan money to post collateral demanded by these firms, sources close to those deals say.

Beware of Congress’s Threat to Tax 401Ks
With the bear market red in the claw, with an equal opportunity bear market taking out solid stocks right and left, with panicked investors feeling like every headline is an explosion, comes this impenetrable stupidity:

Some Democrats in Congress have held hearings that included discussions of new proposals to tax 401K money. Specifically, the idea would be to eliminate most of the $80 bn in annual tax breaks that 401(k) investors receive. Which means a nearly $80 bn tax hike.

House Democrats several weeks ago invited Teresa Ghilarducci, a professor at the New School of Social Research in New York City, to testify before Congress on her plan to eliminate the preferential tax treatment of 401K plans.

Specifically, Ghilarducci testified before the House Education and Labor Committee, chaired by Rep. George Miller, (D-Calif.), about her plan.

The idea is to redirect 401K tax breaks to a new government system of guaranteed retirement accounts into which all US workers would be have to contribute.
Specifically, under Ghilarducci’s plan, the tax breaks on 401K contributions and earnings would be eliminated.

Instead, all workers would get a $600 annual inflation-adjusted subsidy from the U.S. government. The sum would be inflation-indexed. Workers then would be forced to invest 5% of their pay in a guaranteed retirement account administered by the Social Security Administration.

That money in turn would then be invested in government bonds that would pay a teensy 3% a year, adjusted for inflation, less than half the inflation-adjusted 7% return the stock market has delivered.

“I want to stop the federal subsidy of 401Ks,” Ghilarducci has said, adding, “401Ks can continue to exist, but they won’t have the benefit of the subsidy of the tax break.”

A vote for "change"? Good freakin luck living with your vote...

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