Mark Carney announced a few days ago the Bank of Canada will keep its benchmark interest rate steady at 1%. This announcement comes despite his previous warnings over the enormous increase in Canadian private debt. But of course the run up in debt couldn’t have occurred if interest rates were determined by market factors only. Had supply and demand been allowed to function freely, interest rates would have risen as a check on the swell in debt accumulation. Carney won’t admit this though. Like all central bankers, he has made a habit of boasting the positive effects of his low interest rates policies while avoiding blame for the negative consequences. He is a bartender who gleefully takes the drunk’s cash while replying with “who, me?” when said drunk drinks himself to death. Carney’s decision to keep interest rates suppressed is yet another instance of a central banker unable to face reality. The malinvestments will continue to accumulate and will have to be liquidated at another date. What Carney has done to mitigate the looming debt and housing bubble is effectively kick the can down the road. He has revealed through his actions the undeniable truth which holds for all central bankers: that they have no other card to play but the printing press.
Spain is holding out for a better bailout deal. Spanish banks need an estimated €40 billion but will likely need much more than that. (see definition of ‘recipriversexcluson’) The ECB wants to lend the money to Spain so that it can then bailout it’s own banks but Spain wants the ECB to lend the money directly to the Spanish banks, in this way the ‘loan’ is not a Spanish sovereign liability but a liability of the banks themselves. The ECB, correctly, perceive that those Spanish banks don’t have an assured future even with a bailout, whereas, the country of Spain is unlikely to disappear from the map of Europe anytime soon, and they have a better chance of getting their money bank from Spain than if they bailed out the banks directly. This issue is at the heart of the negotiations which have taken place over the last week and look set to be concuded by teleconference this afternoon. I’ve written above that it’s the ECB negotiating with Spain but in reality it’s Germany and some other Northern Eurozone countries who are driving the ECB position.
All this wrangling appears rather interesting if you happen to be a Greek trying to decide who to vote for in the upcoming Greek election.
Rand Paul just endorsed a man who is deeply hostile to human liberty. Perhaps that’s Rand’s idea of playing politics? Come to the table, strike a deal, get what you can. Trouble is, it’s tough striking a good deal when the guy on the other side of the table believes that the government should be allowed to claim — without having to produce any evidence whatsoever — that certain people are terrorists, and therefore should be detained indefinitely without any kind of due process. John Aziz has always been uncomfortable with the children of politicians becoming politicians. Every anointed child feels like a step away from meritocracy. Dynasties are dangerous, because the dynasty itself comes to be more important than the qualities of the politicians. Who would Rand Paul be if he wasn’t Ron Paul’s son? Just another neocon. They just ride on the establishment steamroller, into foreign occupations, empire building, corporate welfare, and banking bailouts. Into Iraq, and soon into Iran. Rand Paul just got on the steamroller.
When you hear two politicians in the US going toe to toe arguing about public finances (i.e. money that isn’t theirs), they’ll often cite numbers published by the Congressional Budget Office (CBO). In political circles, the CBO is considered an honest broker - an objective referee that simply presents the facts without taking a position on the numbers. Today they’ve released an infographic showing America’s debt to GDP ratio over the last 100-years, through World War I, the Great Depression, World War II, the Nixon Gold shock, and the Global Financial Crisis. For what it’s worth, both of the CBO’s scenarios for future debt growth seem absurd underpinned by an even larger assumption– that the status quo is maintained, i.e. the United States remains the world’s most powerful economic force, can print currency at will without consequence, and can inspire foreigners to buy Treasuries. Rather than relying on some bureaucrat, though, history is really the best indicator for what will happen in the future. It may not repeat, but it’ll certainly rhyme. And history shows that the long-term likelihood is financial repression, severe inflation, and/or default.
We're like a sprawling family bickering over the inheritance: we'll keep arguing over who deserves what until the inheritance is gone. That will trigger one final outburst of finger-pointing, resentment and betrayal, and then we'll go do something else to get by. The "solution" is thus collapse. This model has been very effectively explored in The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization by Thomas Homer-Dixon. The basic idea is that when the carrying costs of the society exceed its output, the whole contraption collapses. The political adjunct to this systemic implosion is that the productive people just stop supporting the Status Quo because it's become too burdensome. The calculus of self-interest shifts from supporting the bloated, marginal-return Status Quo to abandoning it.
So the root problem is the system, human nature, blah blah blah. There are no "solutions" that can fix those defaults. The "solution" is collapse, as only collapse will force everyone to go do something more sustainable to get by.
In today’s world, there are many who want government to regulate and control everything. The most bizarre instance, though — more bizarre even than banning the sale of large-sized sugary drinks — is surely central banking. Why? Well, central banking was created to replace something that was already working well. Banking panics and bank runs happen, and they have always happened as long as there has been banking. But the old system that the Fed displaced wasn’t really malfunctioning — unlike what the defenders of central banking today would have us believe. Does central banking retard the economy by providing liquidity insurance and a backstop to bad companies that would not otherwise be saved under a free market “bailout” (like that of 1907)? And is it this effect — that we call zombification — that is the force that has prevented Japan from fully recovering from its housing bubble, and that is keeping the West depressed from 2008? Will we only return to growth once the bad assets and bad companies have been liquidated? That conclusion, we think, is becoming inescapable.
One of the great absurdities of our modern financial system is that a nation living within its means, i.e. spending less than what it confiscates in tax revenue, is no longer the norm. Living within your means is now considered ‘austerity’. And unfair. Whether in the UK, Europe, or North America, many voters have become so accustomed to the government’s massive role in the economy, they can’t begin to imagine how it could be scaled back. The more insolvent governments become, the more they’re going to be forced to axe all the things they can’t afford. We’re already starting to see this in places from California to England that can no longer hide from their fiscal reality. With the government monopoly out of the way, the private sector will mop up every service that it can turn a profit on– trash collection, security, fire, prisons, libraries, etc. This forces competition, higher quality service, and lower prices for everyone. The people who protest against austerity, or think it’s a tragedy when a courthouse closes down due to budget constraints, are really missing the larger point: the sooner this corrupt house of cards collapses, the better off we’ll all be.
Capitalism can be subverted by either an Elite or the majority. Marx traced out how Capital (wealth) naturally consolidates into monopolies or cartels (shared monopolies). These concentrations of wealth then buy political influence via campaign contributions, armies of lobbyists and the full spectrum of cronyism: sweetheart deals, envelopes of cash, revolving doors between the cartels and their regulators, plum jobs for lazy nephews and so on. This base corruption of the Central State, which is now the dominant force in the economy, allows Elites to change the rules rather than accept failure (also known as losses). Thus we have Crony Capitalism: profits are private and yours to keep, losses are transferred to the taxpaying public. This mechanism is well known and catches most of the attention. But M.M. highlighted the way the democratic majority can subvert capitalism. This is generally ignored for the simple reason that most commentators are part of the majority subverting capitalism to benefit their own self-interest.
This leads to a terminal state of self-delusion and self-justification
"Crowds Cheer Queen On Last Day of Jubilee" So ran the headline from Time. Yesterday marked the end of the “Diamond Jubilee” of Queen Elizabeth II of the British monarchy. The four day celebration was is honor of her ascendancy to the throne sixty years ago. Monarchies are supposed to be antithetical to freedom. Under feudalistic monarchism, the notion of personal liberty took a backseat to loyalty to the king. Those who weren’t part of or close to the nobility were referred to as subjects. These peasants were to serve without question. Today, the only difference between the systematic malfeasance and plunder that existed under the rule of monarchs and that which defines the state is the ballot box. Voters in a sense get to choose a small portion of their rulers. This gives them the mirage of freedom when the nation-state they inhabit is no less than a contemporary field of serfdom lorded over by kings. Too much of the public still behaves with the mindset of servants. They are pathetically docile to those who hold the keys of their shackles. What the celebration of Queen Elizabeth’s sixty year rule showed is that the people of Great Britain never really escaped from monarchy.
It may feel like I'm out of touch with the precious metals markets to broach the subject of a mania today, but I think the table is being set now for a huge move into gold and silver. There are, however, very valid reasons to reasonably expect a mania in our sector. For one thing, manias have occurred many times before, but the main issue is that a mania in gold and gold stocks is the likely result of the absolute balloon in government debt, deficit spending, and money printing. Saying all that profligacy will go away without inflationary consequences seems naïve or foolish. Inflation may not attract investors to gold and silver as much as force them to it. Now, one could make the argument that any rush into gold and silver will be muted if no one has any savings, especially given that demographers say a quarter of the developed world will soon be retired. But even if individuals are wiped out, the world's money supply isn't getting any smaller, and all that cash has to go somewhere. I wanted to look at cash levels among various investor groups to get a feel for what's out there, as well as how money supply compares to our industry. Data from some institutional investors are hard to come by, but below is a sliver of information about available cash levels. I compared the cash and short-term investments of S&P 500 corporations, along with M1, to gold and silver ETFs, coins, and equities. While the picture might be what you'd expect, the contrast is still rather striking.
Today, short-term interest rates are set by the diktats of the central bank. And long-term interest rates are set in a “market” in which the central bank is obliged to keep coming back to buy ever more bonds, and speculators front-run the central banks to buy ahead of them. The result has been that, for 30 years and counting, the bond price has been rising, which is the same as to say that the rate of interest has been spiraling into the black hole of zero. When it gets there (and probably sooner) the entire monetary system will collapse. This is the terminal stage of the disease of irredeemable paper currency. They have banished money (gold) from the monetary system, and the result is a positive-feedback-loop that destabilizes the rate of interest. The rate of interest has a propensity to fall, just like the value of the paper currency itself. This leads to the question of how interest rates are set by a free market under a gold standard. This is a non-trivial question, and the answer is profoundly important as we debate what sort of role gold ought to play and evaluate the various gold standards being proposed.
The big news out of New York City these days is Mayor Mike Bloomberg’s proposed ban on the sale of soda drinks over 16-ounces (about 1/2 liter) at restaurants, movie theaters, sports stadia, street carts, fast food chains, etc. Bloomberg stressed that we have a responsibility to combat obesity, diabetes, and heart disease, and that the government must consequently regulate what people can/cannot put in their bodies. Michelle Obama even came down to applaud the idea.“Excuse me,” I asked, “but who exactly is ‘we’…? I certainly didn’t come into this world born with a burden prevent obesity. And I’m pretty sure nobody else signed up for it either.” ‘We’ is one of the most dangerous words in the English language, particularly when bandied about in Western representative democracy. It’s a term often used when a politician wants to thrust a burden or obligation onto everyone else’s shoulders, but without being too direct about it... Such policies, however, fall on a very slippery slope. When government begins regulating X, the regulation of Y and Z will follow by extension. This is how frogs are brought to a boil– slowly, deliberately, gradually, and grounded in good intentions. The real question is whether you want to be trapped in the same pot as everyone else.
On our current course, there is no other choice for the average American but to say no, regardless of the law, or the threat of its violent enforcement. Rebellion, in all its forms, is as natural as the cycles of the Earth. It reoccurs time and again, sometimes suppressed, but not for long. The horrors of governments gone rogue are no secret. We have so many examples in history to draw from it is hard to imagine any crime despots have NOT visited upon innocents. Frankly, if control thirsty elites can refine tyranny down to a science by examining the mistakes of the past, there is nothing stopping us from refining defiance down to an art form as well. Again, what other choice do we have, but to take heart in the knowledge that though there is no assurance of victory, there is also no assurance of defeat.
The state purports to represent the people when all it does is leech off their labor in order to commit crimes at home and abroad. Under the auspices of keeping democracy safe around the world, the foreign policy of the U.S. government has been one of bombing, killing, and overall domination. Meanwhile, anti-American sentiment continues to spread by instances such as the C.I.A. targeting civilian responders to drone strikes who attempt to aid those who were attacked. In some cases, the C.I.A. even launches drone attacks at the mourners in funerals held for those in earlier strikes. These are the measures under which the American people are told they are being kept safe. What would be constituted as war by any other nation is not so when carried out by the U.S. government. But it’s all just another facade through which Washington pretends to serve the people when in reality it puts them in even more danger.
At this moment, the news media is constantly clamoring about the "Three Ds" that are buffeting the markets: debt, deleveraging, and deflation. We intuitively sense that they're linked -- but how, exactly? Understanding this linking is critical; as debt has fueled the global expansion, it will also dominate its contraction. To illustrate the forces of debt and deleveraging, let’s consider a home mortgage....