Archive - Sep 20, 2011

According to an article in Swiss newspaper NZZ (Neue Zuercher Zeitung) the SVP party (Swiss People’s Party) launched a referendum to “protect” the 1,000 tonnes of gold owned by the Swiss National Bank (SNB). Their aim is to:

• make it unconstitutional to sell gold
• force the SNB to hold 20% of its assets in gold (currently 16%)

The SVP said the sale of 1,500 of the SNB’s 2,500 tonnes of gold was regrettable, especially given the Swiss population had no say in this.

Anyone who may have gone to bed last night assuming some version of long-termist reality would finally creep back into the market following rumblings of all out trade war between China and Europe will be sorely disappointed as instead stocks are once again focused on the purely superficial, such as that Greece did not go bankrupt last night and did make its €770 million payment this time, although what will happen in the future depends entirely on the Troica. As for the Troica, their animosity toward Greece will hopefully be moderated after Greece denied a report from Kathimerini, which as we expected had about zero percent chance of any credibility to it, that it would go ahead with a eurozone participation referendum, which obviously would have ended the Euro as the majority of people in Greece (and all of Europe) are well over the monetary experiment. Lastly, Siemens scrambled overnight to clarify the FT news that it had pulled money from a French bank, SocGen as it turns out, but says that this happened back in July, and had nothing to do with the current troubles at the French bank. Lastly, two bond auctions by Spain and Greece came at around previous result, and hence much better than the collapse expected further adding to the short covering pressure.

Worldwide, there is a shortage of capital. Leverage levels exceed those of the Tech Bubble. Even Central Banks, such as the Fed are leveraged to the hilt (with $50 billion in capital and $2.8 trillion in assets, the Fed is leveraged at 56 to 1. Lehman was at 30 to 1 prior to its collapse).

What if, only what if....?

This paper shows the kind of brilliant research that gets done now that economic commentary is only pursued by Ph.D.s. In this paper, Johansen and Simonsen (2011) come to the surprising conclusion that (spoiler alert!) the US economy operates on Keynesian principles; which differs significantly from its official policy of creating credit whenever a problem appears. The principal evidence offered in support of the author's conclusions is the following chart, showing that both the value of the Dow Jones Industrial Average (DJIA) and the amount of public debt have increased logarithmically since the late 18th century. And since correlation implies causation, the rise of the DJIA must be due to the increasing public debt. Now that we understand how the economy works, it becomes clear how we move forward. Raise public debt. Boost the DJIA! The trickle down effects on the economy shall enrich us all.