Money Supply

Everyone's favorite bull made another magnificently arrogant appearance on TV this morning. Following his recent CNBC embarrassment, Bloomberg TV interviewed the outperforming hedge fund manager this morning - during which he explained his 'where else ya gonna go' bullish stocks thesis. From expectations for an "explosion of greatness" in the US to his gratuitous flirtation, he appears to have the inane ability to use many words where few are needed and his bullish thesis has the ring of any and every guest pumper (with nothing new to add): the same supposedly 'low' multiple, central-banks-are-printing, and wide spread between bond and equity yield argument that everyone's mom can explain. From expectations for the 'great rotation' from bonds to stocks and his 50%-upside prediction in Citi, Tepper is "balls to the wall" the best guest ever on any stock-touting network. However, one little thing gets in the way - the last time the Great-and-Powerful Tepper appeared so overtly bullish of stocks (and financials specifically), he also was dumping his holdings into the rally that followed.

If governments or central banks really can create wealth simply by creating money, why does poverty exist anywhere on earth?  Why haven’t successive rounds of quantitative easing by the US Fed solved our economic recession?  And if Fed money creation really works, and doesn’t create inflation, why haven’t Americans gotten richer as the money supply has grown? The truth is obvious to everyone.  Fiat currency is not wealth, and the creation of more fiat dollars does not mean that more rice, steel, soybeans, Ipads, or Honda Accords suddenly come into existence. The creation of new fiat currency simply strengthens a fantasy balance sheet, either by adding to cash reserves or servicing debt.  But this balance sheet wealth is an illusion, just as the notion we can continue to raise the debt limit and borrow money forever is an illusion. 

Courtesy of Diapason's Sean Corrigan, here are some 22 charts taking us around the world's markets and back.

Over the past few months, the perception has been that the risk of a meltdown in Europe (characterized by the loss of market access for Spain and Italy) has grown increasingly remote. The relative calm comes courtesy of the ECB which conventional wisdom has it, began acting "like a real central bank" in September when it announced it was willing to throw eurozone taxpayers' wallets behind theoretically unlimited purchases of Spanish and/or Italian bonds. This promise of course, was meant to discourage so-called "bond vigilantes" (otherwise known as investors who know a bad deal when they see it) from "speculating" on rising periphery bond yields. As it turns out, the effect of the as yet untested Draghi put has been dramatic. Spanish and Italian 10s have tightened by a ridiculous 240 basis points since late July. 

Following Part 1 (History), Part 2 (Interventionism),  and Part 3 (money vs. credit), Part 4 considers another kind of credit: the Real Bill, designed to provide a bridge between service providers and supply chains. Although initially appearing inflationary, it is the restriction of counterfeit credit that keeps Real Bills in tact as they will inevitably spontaneously circulate as a clearing mechanism for transactions (thus avoiding the credit inflation). In practice, the Real Bill is nothing more than the invoice of the wholesaler on the retailer.  Opponents of Real Bills have a dilemma.  They can either oppose them by means of enacting a coercive law, or they can allow them because they will spring into existence and circulate in a free market under the gold standard.  We can hope that the principle of freedom and free markets leads everyone to the latter.

In this piece, I re-examine what many economists call "financial repression" and I find it to be sorely lacking as a description of what is happening. I also look at a related concern about the loss of central bank independence. Color me skeptical.

That China openly manipulates its economic data, especially around key political phase shifts, such as one communist regime taking over for another, is no secret. That China is also the marginal economic power (creating trillions in new loans and deposits each year) in a stagflating world, and as such must be represented by the media as growing at key inflection points (such as Q4 when Europe officially entered a double dip recession, and the US will report its first sub 1% GDP in years) as mysteriously reporting growth even without open monetary stimulus (something we have said the PBOC will not engage in due to fears of importing US, European and now Japanese inflation) is critical for preserving hope and faith in the future of the stock market, is also very well known. Which is why recent market optimism driven by "hope" from Alcoa that China is recovering and will avoid yet another hard landing, and Chinese reports of a surge in Exports last week, are very much suspect. But no longer is it just the blogosphere that is openly taking Chinese data to task - as Bloomberg reports, even the major banks: Goldman, UBS and ANZ - are now openly questioning the validity and credibility of the goalseek function resulting from C:\China\central_planning\economic_model.xls.

Probability estimation is non-intuitive. If you need to make an important decision about the odds of something occurring, don't go with your gut. It will be often wrong (sometimes wildly so). Get data, crunch the numbers, and consult a professional if you can't figure things out on your own. This caution with regard to decision-making has served me well over my career. I've lost count of the number of times I began with a strongly-felt guesstimate that was torn to shreds by the time I did the math and learned how far reality was from my gut instinct. And what worries me – scares me, is more accurate – is that I don't observe this same caution in the actions of the people making the truly big decisions. Like the Fed, Congress, and many of our state governors. Instead, I see people – many of whom don't have strong empirical skills or practical business experience – making rash decisions about debt, deficits, taxes, money supply, interest rates, pensions, etc. that will have implications on a staggering order of magnitude. I myself can't wrap my brain fully around some of these (classic example: The Crash Course Chapter 11: How Much Is a Trillion?). And even though I'm by no means the smartest guy in the room, I have little confidence that a career politician is able to comprehend these gargantuan repercussions at a materially higher level than I can.

Why must the debt grow every year? To keep the debt-servitude paradigm going. To increase economic activity in a country operating in this type of system, you need to increase the level of credit and thus debt grows in tandem. This is self serving: if debt is the “fuel” to increase economic activity, interest payments will become larger and larger, until eventually it reaches a point where debt can no longer be increased. This point is known as the Minsky moment–when there is no net benefit to extra debt. So there we have it, in our “creditopia” world, if debt does not expand, the economy cannot grow and jobs cannot be created. In order to increase debt, foreigners have to continually finance the ever growing debt by purchasing government bonds and selling consumer products to the US. In turn, the US must increase the level of consumption, decrease savings, and eliminate the threat of any nation posing a risk to the US dollar hegemony. Is this a symbiotic or a parasitic relationship? Is is certainly a relationship that cannot grow forever. It poses an economic risk for ALL nations due to the interconnectedness of the global economy.

• Introduction – Gold’s Gains In All Fiat Currencies in 2012

• Much of Gold’s Gains in 2012 On 11% Price Gain in January 2012

• Japanese Yen Shows How Gold Protects From FX Devaluations

• Food Inflation Risk As Wheat and Soybeans Surge in Price

• Currency Wars and Competitive Currency Devaluations

• Gold Remains Historically and Academically Proven Safe Haven

• Conclusion – Gold in 2013

In part one of this two part series – Hey You – we examined how an invisible government of wealthy, power hungry men have utilized the propaganda techniques of Edward Bernays and lured the American people into a narcissistic, techno-gadget, debt based servitude. Over the last one hundred years they have created a totalitarian state built upon egotism, material goods, and fulfilling our desires through Wall Street peddled debt and mass consumerism. It has been an incredibly effective form of control that has convinced the masses to love their servitude. The lyrics to Pink Floyd's 'Mother' had both a literal and figurative meaning for Roger Waters. Having seen his Wall Tour performance this past summer at Citizens Bank Park with a diverse crowd of 40,000, ranging in age from senior citizens to teenagers, it seems this song has gained new meaning. He sang a duet with himself from 1980 projected on the Wall and when he sang the lyric, “Mother, should I trust the government?” the entire stadium responded in unison – NO!!! This revealed a truth that is not permitted to be discussed by the corporate mainstream media acting as a mouthpiece for the ruling class. A growing legion of citizens in this country does not trust the government. This is very perceptive on their part.

Peer-to-Peer Lending and Crowd-Funding Have the Power to Change Finance

In the spirit of the holidays and hope for a more prosperous 2013, we thought readers might appreciate a little humor to partially offset the relentless 'cliff' doom and gloom. So please, don’t take this too seriously. But if you happen to stumble across a ‘paperbug’ or two over the holidays, perhaps you could share some of the points made here. Humor sometimes helps people realize just how hopelessly misguided they are... Quantitative easing changes nothing. Remember, the PhDs are in charge of our economies and they know exactly how much our money should be worth. Those of us concerned that our money might lose purchasing power are just being paranoid. Choice is dangerous. Think Adam and Eve and you’ll get my point. Those arguing in favour of monetary freedom, of choice in money, of repealing legal tender laws, they’re just like that nasty snake Lillith in the Garden of Eden, the source of all trouble I tell you. ‘Tis the season to borrow and spend folks, as indeed it has been since 1971.

More exiting than Christmas!

Imagine a stock - best for the hypothetical exercise is probably a tech stock - rising for 12 years without interruption. A net gain every year, sometimes a small one, sometimes a bigger one, but nicely compounding at an annual yield of more than 17.13% (that's a devilish 666.67% in 12 years). What would people say about this stock? Would there be a steady stream of negative press trying to dissuade people from buying it? We somehow doubt it, although almost every investment that has seen a great deal of appreciation has its detractors (and sometimes they are right). When it comes to gold, one could certainly debate the merits of buying it at what appears at least on the surface as a high price. Gold bulls can only profit from examining bearish arguments, in order to see if they have merit.