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The Money Illusion That Drives Today's Texas/Canada Economic Hype
by John Tamny, Toreador Research and Trading (Guest Contributor)
For those who watched television with any frequency in the 1980s, they surely remember the ubiquitous presence of Robin Leach, host of Lifestyles of the Rich and Famous. With a recovering economy having powerfully revived the ability of Americans to grow very rich, Leach's show was a guilty pleasure for those eager to see how they lived.
Of course the '80s economic expansion wasn't uniform across all fifty states. Leach noted this, and would occasionally turn his attention to a lagging Texas. During the early '80s Leach's cameras revealed pawn shops in the Lone Star State that were lined with rows and rows of repossessed Rolls Royce automobiles up for sale after their original, formerly oil-soaked owners had gone bust. If not familiar with Leach's recessed Texas imagery, many have doubtless read Friday Night Lights, H.G. Bissinger's classic book about high school football in Odessa, TX. If so, they may well remember the author's aside on oil-rich Midland, TX, and how it could claim one of the world's most profitable Rolls Royce dealerships in the 1970s.
Farther north in Iowa and other farm states, the 1980s similarly brought hard times. Having expanded and invested in land and new farm equipment during the '70s, when commodities began their decline in the '80s a lot of formerly economic investments were exposed as less than profitable in a very painful way. Farm-Aid concerts soon followed.
The driver of the horrific capital misallocations that boosted commodity-rich parts of the U.S. in the '70s was the money illusion. With investors having bought into the fanciful view that oil, wheat and meat were scarce, as opposed to beneficiaries of nominal spikes driven by a weak dollar, heavy investment followed only to be negatively exposed with the 1980 election of Ronald Reagan, and a return to a stronger dollar.
Tales of the boom/bust cycle that befell commodity-centric areas a little over 30 years ago have a rhyme to them today. With the dollar in the midst of a 10-year decline, commodities are spiking in nominal terms, and commodity-rich locales are once again the all the economic rage.
Recently this writer has observed headlines such as "California Dreamin' About Texas Jobs", "Houston: Model City", and "Why North Dakota Is Booming" stateside, along with editorials about the Canadian "economic miracle" up north; the broad narrative one of Canada's right-of-center politicians getting economic policy right, and as such, being "rewarded for their economic success." Taking nothing away from the undeniable good that results from Texas's low-tax model, or for that matter, a move toward economic liberalization in Canada, there's a lot of money illusion embedded in today's hype.
Indeed, what's not remarked on enough by commentators when discussing economic renaissance in countries such as Canada, and states like Texas, is how much of the growth is driven by the fact that they're both commodity rich. And as history tells us, during periods of currency weakness a great deal of capital flows to locales where commodities are plentiful.
Iowa? Recently in Des Moines to give a speech, this writer was blown away by all the buoyant optimism within a state put on its back not long ago by a strong-dollar driven flight away from the real. Not far away in North Dakota, a state which is the picture definition for some of prosaic economic activity, its impressive oil reserves have made it a locale full of boisterous economic activity; its population having grown 5% since 2000 according to demographer Joel Kotkin.
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For Canada, Texas, Iowa and North Dakota, the common denominator they all share is that the economy in each is relatively focused on commodities, and with commodities near nominal all-time highs thanks to a weak dollar, job-creating investment has followed. Times are somewhat grand in commodity-rich locales at present, but as has historically been the case, U.S. monetary authorities eventually wake up to their monetary errors, and when they do, the commodities priced in dollars will fall substantially, and with it, a lot of production that was made to appear viable by the illusion of a falling dollar.
Looking at this in the reverse, during periods of intense currency strength, the late '90s most notable in that regard, capital flows away from sagging commodities and into metaphysical economic concepts of the technological variety. In that sense it's no mistake that so many good and so very many bad Silicon Valley ideas were funded in the late '90s only to be eventually exposed as worthless. Basically the strong dollar made a lot of marginal technologists appear attractive in the investment sense, but as the inevitable Internet bust would reveal, people like Amazon's Jeff Bezos don't grow on trees.
Back to the Texas and Canada, though they boom at present with commentators falling all over themselves to praise their sound economic models, this won't end well for two reasons. For one, profits attract imitators, and as this is being read a lot of marginal producers are entering the commodity space, funded by lemming investors desperate to avoid missing out on the boom. The marginal producers and investors are distorting the markets, and their crashes will come first in a very ugly way.
Secondly, and as mentioned before, Washington will eventually wake up to its monetary error owing to the broad pain the weak dollar is bringing to the electorate. When this occurs, commodities will decline substantially in nominal terms as they did in the '80s and '90s, and with that decline, the game will be up.
For those who doubt this, it should be noted that an ounce of gold at $1,500 in 2011 buys 15 barrels of oil, much as a $480 ounce of gold bought 15 barrels of oil at $32 in 1981, much as a $35 ounce of gold bought 15 barrels of oil in 1971. As the constant that is gold reveals in living color, the broad commodity boom is very much the stuff of money illusion, and when the dollar strengthens in concert with gold's decline, commodities will soon follow such that a lot of attractive investments at nosebleed commodity prices will be unmasked in an embarrassing way. History always seems to repeat itself.
The policy answer to this is simple. Monetary authorities should move hastily to fix this most obvious of monetary mistakes through policies meant to strengthen the dollar.
Indeed, every day they delay means that more and more human, physical and financial capital is being misallocated on the way to capital destruction, not to mention the emotional/financial toll it will impose on the late arrivals to a weak-dollar driven phenomenon. The sooner this trend is reversed the better.
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....when the dollar strengthens in concert with gold's decline.
Unless something changes, nothing changes. And absolutely nothing happening is dollar positive. The extreme opposite, in fact, at an accelerating rate. Bermonkey was, is and ever will be a counterfeiting idiot*, cementing his legacy as the captain of the USD Titanic. Unless something changes, gold will continue to reflect the cascading disaster.
*no offense to idiots.
A reasonable argument, except that I don't buy this; "monetary authorities woke up in 1980". This means you accept the Volcker & his high interest rates thesis, which is dubious at best.
Credit expansion has only increased in exponential fashion since 1980, debt quality all across the spectrum has continued to deteriorate. It is all backstopped by the government. What makes, & how do, you think that the government can improve the quality of its credit? By saying so? Will they make UST's AAAA?
I would posit that much of Reagan's 'strong dollar' policy was actually devaluation by other nations. Will other nations continue to destroy their own credit for the advantage of the USA?
I am afraid that when you speak of the economy in Houston, Dallas and Texas in general, you haven't a clue as to what you're talking about. I bought my house five years ago for $103,000; three bedrooms, two full-baths, excellent schools. Value today: $103,000.
In order for there to be some mis-alignment or misallocation of resources, there must be obvious bubbles somewhere. Sorry, they're not here.
In addition to refining oil, as Houston has no oil itself (sorry, no commodities here, just skills others don't have or want in their back yard...), Houston also has the largest medical center and finest medicine practiced anywhere in the world. Don't believe it? Look up Texas Medical Center and see it on a map. You wouldn't believe it. Really.
Dallas and Austin also have their niches besides natural gas and lawyerism, including high-tech start-ups. San Antonio is one of the fastest-growing cities in the United States and for very good reason: you can find a good-paying job and a house for $103,000, low taxes and kid-friendly public schools. What else is there?
Now, if you'll excuse me, I have to go polish my Rolls.
Ha!
:/
It seems that if the Fed really got serious about the dollar and pushing interest rates to a higher level, what is left of real estate would implode. If mark to market were enforced at that point the banks would be toast and the GSE's would need Uncle Sugar to maintain their position. How many banks would be nationalized at that stage? I was in Texas in the 80's and it was a depression, not a recession. There were so many bankruptcies it became the then "new normal" for anyone with any entrepreneurial spirit, and for a lot who were establishment too. Extend and pretend and hope it gets better is my bet for the foreseeable future for Fed policy.
It's coming off those tracks. That is certain now. The issue is when.
The author of this article assumes the situation today is what it was the last time commodities peaked. There's a little difference in our balance sheet.
The future won't be a linear progression of the past.
When? What makes you think this will happen at all? You think that politicians in the U.S. care more about the electorate than the politicians in Greece, or Spain, where the electorate is now reduced to rioting to make itself heard? Or Ireland, where the electorate put in a new government, which promptly turned around and stabbed them in the back?
This is not a monetary error. This is the plan, proceeding as intended: Fuck the electorate, make sure the bankers get paid.
It is not about greed.
it is about keeping the train on the tracks, nothing else.
I live in a farming state - he ain't kidding about the "newfound wealth" that masks as a weak dollar - those boys are dropping cash on anything with green or red paint, new this - new that, its absolutely amazing.
Heres the kicker: AT NO POINT HAVE I HEARD ANY COMMENT ABOUT WEAK DOLLAR, BERNANKE, ETC....Its like the Gods have just been kind to them for past abuse.
double post
Sorry VE, but you are retarded. This is not the 1980's redux, this is the end of the dollar.
You must be smokin' some of B.C.'s finest.
"Monetary authorities"
Whatever are you referring to?
The swamp creatures that placed the world in this precarious position?
Enough to make one lose breakfast.
Money Illusion exists, but Debt Illusion is addictive; always requiring more juice to get the higher high.
Until the China/Walmart job destruction ends and until financing short term welfare (including banker welfare) with long term debt ends, I think Money Illusion with outlive Debt Illusion.
Does anyone seriously think this county is prepared to go cold turkey and start living within its means ?
Double Post-BITCHEZ
At some point the country will be forced to live within its means when the illusion of worthless dollars is shattered...See ZIMBABWE (100 trillion dollar bill worth nada). Now after destroying their currency Zimbabwe wants to create a gold backed currency so maybe some faith will be restored in their country. Gideon Gono and Ben Bernanke had to be roommates sometime druing college.
Money Illusion?! The only illusion is the fiat currency backed by nothing but some BITCHEZ at a central bank who promise to create inflation every time they meet. Commodities are tangible, real assets, currency if you will. Commodities rarely if ever change VALUE. They just illustrate the weakness of fiat currencies. Coomodities are a counter claim on no one's books. They owe nobody anything and stand alone. They do not rely on politics, central banks, or fiscal policy for their VALUE. All of the aforementioned things may have 'transitory' effects on commodities, but their value is always able to rise above the bullsh*t. As fiat currencies die, commodities will represent what they have represented for over 5000 years, real wealth BITCHEZ!
this fellow John Tamney is an idiot.
Texas will be the first to leave the Union. The USA does nothing for Texas.
Texas is one of the only states that does not tax groceries. And does not have a state income tax.
.
Texas receives $0.94 for every $1.00 it pays in tax revenues to the federal government.
Anyone who complains that red states are receiving too much in federal funds should urge Obama, Reid, and Pelosi to cut federal taxes and spending so that blue states can keep more of their tax revenues in-state.
Ha Ha Ha Ha Ha.... Like Washington Damn Corruption is going to turn its back on the people who own it, their friends and patrons on Wall Street New York City. You very funny man. You make me laugh. You real comedian.
We've got a long way to go brother, at least through the end of 2012, and if you believe in the power of solar system transites of the galactic plane we just might get real change, change you can believe in and not just in your pants. But then again, it might not be the change you were thinking of.... still.....
"Monetary authorities should move hastily to fix this most obvious of monetary mistakes through policies meant to strengthen the dollar."
They should. But they won't.
Haha, they cant. Well, they can but all the big banks will go broke again of course. Pretty simple math considering anyone who hasn't defaulted on their mortgage is now refied at below the rate of inflation.
This article is totally fuckin fucked. If Bernanke raised rates to even close to what theyw here in the 80's, the intrest on the debt would cost the USG the whole budget 3 times over.
Every idiot here believes that the economy is 'recovering' because of 'fiscally sound' government policies, not because we're being minorly compensated for giving away our natural resources. Sheep to the slaughter.
I give it about 5 years before the Marine Corp is occupying Ft.McMurray.