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Guest Post: Fiat Money Kills Productivity

Only a wilful and ideological Keynesian could ignore the salient detail: as soon as the USA left the gold exchange standard,  total factor productivity began to dramatically stagnate.   Coincidence? I don’t think so — a fundamental change in the nature of the money supply coincided almost exactly with a fundamental change to the shape of the nation’s economy. Is  the simultaneous outgrowth in income inequality a coincidence too? Keynesians may respond that correlation does not necessarily imply causation, and though we do not know the exact causation, there are a couple of strong possibilities that may have strangled productivity. It’s not just total factor productivity that has been lower than in the years when America was on the gold exchange standard — as a Bank of England report recently found, GDP growth has averaged lower in the pure fiat money era (2.8% vs 1.8%), and financial crises have been more frequent in the non-gold-standard years.

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Guest Post: Liquidation Is Vital

In light of the zombification that now exists in Japan and also America (and coming soon to every single QE and bailout-heavy Western economy) — zombie companies, poorly managed, making all the same mistakes as before, rudderless, and yet still in business thanks to government intervention  — it is clear that the liquidationists grasped something that Keynesians are still missing. Markets are largely no longer trading fundamentals; they are just trading state intervention and money printing. Why debate earnings when instead you can debate the prospects of QE3? Why invest in profitable companies and ventures when instead you can pay yourself a fat bonus cheque out of monetary stimulus? Why exercise caution and consideration when you can just gamble and get a bailout?  Unfortunately, Mellon and his counterparts at the 30s Fed were the wrong kind of liquidationists — they could not heed their own advice and leave the market be. Ironically, the 30s Fed in raising interest rates and failing to act as lender-of-last resort drove the market into a deeper depression than was necessary (and certainly a deeper one than happened in 1907) and crushed any incipient recovery.

Liquidation is not merely some abstract policy directive, or government function. It is an organic function of the market.

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Guest Post: Who Destroyed The Middle Class - Part 3

Forty five years after the War on Poverty began, there are 49 million Americans living in poverty. That’s a solid good return on the $16 trillion spent so far. It’s on par with the 16 year zero percent real return in the stock market. We have produced a vast underclass of ignorant, uneducated, illiterate, dependent people who have become a huge voting block for the Democratic Party. Politicians, on the left, promise more entitlements to these people in order to get elected. Politicians on the right will not cut the entitlements for fear of being branded as uncaring. The Republicans agree to keep the welfare state growing and the Democrats agree to keep the warfare state growing -bipartisanship in all its glory. And the middle class has been caught in a pincer movement between the free shit entitlement army and the free shit corporate army. The oligarchs have been incredibly effective at using their control of the media, academia and ideological think tanks to keep the middle class ire focused upon the lower classes. While the middle class is fixated on people making $13,400 per year, the ultra-wealthy are bribing politicians to pass laws and create tax loopholes, netting them billions of ill-gotten loot. These specialists at Edward Bernays propaganda techniques were actually able to gain overwhelming support from the middle class for the repeal of estate taxes by rebranding them “death taxes”, even though the estate tax only impacts 15,000 households out of 117 million households in the U.S. The .01% won again.

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Guest Post: Some Thoughts On Investing In The "Bottom" In Housing

There are roughly 19 million vacant dwellings in the U.S., of which around 4 million are second homes and a million or two are on the market. Let's stipulate that several million more are in areas with very low demand (i.e. few want to live there year-round). Let's also stipulate that several million more are in the "shadow inventory" of homes that are neither on the market nor even officially in the foreclosure pipeline, i.e. zombie homes. Even if you account for 9 million of these homes, that still leaves 10 million vacant dwellings in the U.S. which could be occupied. That means 1 in 12 of all dwellings are vacant. Even if you discount this by half, that still leaves 5 million vacant dwellings that could be occupied. Given that the total rental market is 40 million households, that constitutes a very large inventory of supply that remains untapped. Lastly, it is important to note that the ratio of residents to dwellings is rather low in the U.S., with millions of single-person households and large homes occupied by one or two people. The potential pool of existing homeowners who could enter the "informal" rental market by offering bedrooms, basements and even enclosed garages for rent is extremely large, and that is a difficult-to-count "shadow" inventory of potential rentals.

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Guest Post: Oil Price Differentials: Caught Between The Sands And The Pipelines

One of oil's most important characteristics is its fungibility, which means that a barrel of refined oil from Texas is equivalent to one from Saudi Arabia or Nigeria or anywhere else in the world. The global oil machine is built upon this premise – tankers take oil wherever it is needed, and one country pays almost the same as the next for this valuable commodity. Well, that's true aside from two factors that can render this equivalency void. In fact, crude oil prices range a fair bit according to the quality of the crude and the challenge of moving it from wellhead to refinery. Those factors are currently wreaking havoc on oil prices in North America: a range of oil qualities and a raft of infrastructure issues are creating record price differentials. And with no solution in sight, we think those differentials are here to stay.

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Guest Post: The Absurdity Of NATO

The NATO system — set up to oppose the Warsaw Pact system, which no longer exists — functions the same way — rather than dissipating risk, it allows for the magnification of international tensions into full-on regional and global wars. In the late 20th century the threat of nuclear war proved a highly-effective deterrent which limited the potential for all-out-war between the great powers, offsetting much of the risk of the hyper-fragile treaty system. Yet the potential for magnifying small regional problems into bigger wars will continue to exist for as long as NATO and similar organisations prevail. We do not know exactly what arrangements Syria has with Russia and China — there is no formal defensive pact in place (although there is one between Syria and Iran) though it is fair to assume that Russia will be keen to maintain its Syrian naval assets, a view which is supported by the fact Russia heavily subsidises the Syrian military, and has blocked all the UN-led efforts toward intervention in Syria. After the Cold War, the Warsaw Pact was allowed to disintegrate. Until NATO is similarly allowed to disintegrate, the threat of magnification will remain large. Could a border skirmish between Syria and Turkey trigger a regional or even global war? Under the status quo, anything is possible.

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Guest Post: Surprise! An Economy With A Pulse!

With so much economic doom and gloom out there, it’s easy to forget that there are actually some bright spots in the world. I’ve spent the last few days in one of them– Georgia. Perhaps most famous for being continually stomped on by Russia, this place has suffered severe hardship practically since independence from the Soviet Union in the early 1990s. In 2005, Georgia was shut out of the Russian market, it’s largest trading partner. It happened again in 2006. Then, of course, you may remember the Russian military invading Georgia (do you see the theme here?) in August 2008 in support of the breakaway republic of Abkhazia in northwest Georgia. Russian forces rolled across the border, occupied several key areas in the country, and bombed the hell out of Tbilisi just for good measure. The damage is still visible to this day. Yet despite so many challenges, Georgia has finally turned the corner and become one seriously exciting economy with some seriously compelling opportunities.

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Guest Post: Another European Summit, Another Beggars At The Feast Spectacle?

The European Union will hold yet another do-or-die summit this week. On this occasion, “growth” is the plat du jour; the allegedly missing recipe in the “plan” to save the euro. In addition, some suggest that this time is also “different” because Greece, France, Italy and Spain may now be ready to corner Germany to relax its sacrosanct fixation with austerity. This summit truly promises to be quite a gathering of beggars at a feast, no less.

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Guest Post: Free Market Ecology

And so it will continue; as society evolves and progresses, the free market — so long as there is a free market — will naturally reallocate resources and labour based on society’s preferences. Without a free market — and since 2008 when the banks were bailed out and markets became junkiefied intervention-loving zombies, it is highly dubious that there is such a thing as a free market in the West — planners will just end up guessing at how to allocate resources, labour and capital, and producing monstrous misallocations of capital. The political nature of such reallocation is irrelevant; whether the centralists call themselves communists or socialists or environmentalists, their modus operandi is always the same: ignore society’s true economic preferences, and reallocate resources based on their own ideological imperatives (often for their own enrichment). The command economies of the 20th Century — particularly Maoist China and Soviet Russia — produced much greater pollution than the free markets. Under a free market, polluters who damage citizens or their property can be held to account in the market place, and through the court system.There is no such mechanism through the kind of command of economy that the centralists seem to wish to implement.

The answer is not central planning and government control. The answer is the free market.

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Guest Post: Military Rolls Tanks Onto St. Louis Streets...But Why?

I have to say that this event, which is being labeled a "training exercise", makes very little sense to me.  U.S. Army troops all the way from Maryland running open exercises in armored personnel carriers on the busy streets of St. Louis?  I know Maryland is a small state, but is there really not enough room at Ft. Detrick to accommodate a tank column and some troops?  Are there not entire fake neighborhood and town complexes built with taxpayer dollars on military bases across the country meant to facilitate a realistic urban environment for troops to train in?  And why travel hundreds of miles to Missouri?  At the very least, this is a massive waste of funds.

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Guest Post: Does Syria Want A War?

It seems pretty clear that the Syrians know the consequences of their actions. NATO (including deluded US hawks who are happy to ignore the disastrous consequences of the drug war on the US border while talking up more intervention in the middle east) and the NATO-backed Syrian opposition has been looking for any excuse to get stuck into a new interventionist mission. We know that the NATO-backed opposition were prepared to try and get a British journalist killed in a false flag operation in order to trigger a Western intervention. So why did Russia-armed Syria do it? And why (given the age of F-4 aircraft, it could easily have crashed of its own accord giving the Syrians a lot of plausible deniability) are they not at least denying that they shot it down? Is it possible that the wider Eurasian anti-American coalition led by the Russians and the Chinese are confident that NATO will not intervene out of fear of triggering a wider war? After all the Russian naval base has been a great obstacle to NATO intervention. Libya didn’t have any Russian bases, and it took far less internal violence for NATO to intervene there.

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Guest Post: Could This Make Ben Bernanke A Soviet Dictator?

Could this make Ben Bernanke a Soviet dictator?
More than two decades after the fall of the Soviet Union, the Iron Curtain is still alive and well in an often forgotten corner of Eastern Europe… albeit a kindler, gentler version. Belarus has been ruled by the same person, Alexandr Lukashenko, practically since its independence in the early 1990s. He has total control of every facet of the country, from media and information flow, to education, to the military and ‘State Security Agency’ (which is still called the KGB), to the centrally planned economy. Perhaps nowhere is this more obvious than with respect to the nation’s currency, the Belarusian ruble. In 2009, one US dollar bought roughly 2,200 Belarusian rubles. In 2010, that number rose to 2,800. A year later, over 3,000. And today, one US dollar is worth over 8,000 rubles. On the black market, it’s much, much higher. (You can just imagine how much the ruble has lost against gold and silver over the same period.)
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Guest Post: The Fed And Goldilocks Economic Forecasting

fed-revisions-gdptable-062112Beginning in 2011 the Federal Reserve begin releasing its economic forecast for the present year and two years forward covering GDP, Unemployment, and Inflation.  The question is after 18 months of forecasting - just how good has the Fed at forecasting these economic variables?  I have compiled the data from each of the releases for each category and compared it to the real figures and used a current trend analysis for future estimates.... The Fed has been slowly guiding economic forecasts lower since 2011.  The reality is that 2.6% economic growth is not a boon of economic prosperity, corporate profitability, increasing incomes or a secular bull market.  It is also not the "death of America" or the return to the stone age.  What is important to understand, as investors, is the impact on investment portfolios, expectated real rates of returns and the realization that higher levels of market volatility with more frequent "booms and busts" are here to stay.

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Guest Post: When Will Reality Intrude?

If we pursue the line of inquiry established by Chris Martenson’s recent call to Buckle Up -- Market Breakdown in Progress, we come to these basic questions: When will the market reflect the fundamental weakness of the global economy? And when will the market finally hit bottom? Clearly, the correlation between market action and the underlying economy is weak.  While many would declare the stock market to be a “lagging indicator” of recession, even that may be overstating the connection. If we have learned anything in the past three years, it’s that weakening the dollar to foster the illusion of rising corporate profits, central bank monetary easing (QE), and central state borrow-and-spend stimulus can goose the market higher even as the underlying economy remains weak or recessionary. Will the Fed continue to support the U.S. market with QE programs every time it sags? Will QE always work as well as it did in 2010 and 2011? If the history of the deflationary-era Nikkei is any guide (and the BoJ's unprecedented monetary easing while the central government has borrowed and spent unprecedented sums on fiscal stimulus), the bottom could be a year away.

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Guest Post: The Solution to Concentrated Power: The Triple Ds

The solution to centralized power can be summarized as the three Ds: diffusion, decentralization, and devolution of power to local communities.  The concentration of power into the hands of a few bureaucrats in Europe has failed, just as concentrating monetary power into the (privately owned) hands of Federal Reserve bureaucrats has failed. Enabled by a captured Central State, financial power has become concentrated in five banks, media control has been concentrated into six corporations, and so on, ad nauseum. Concentrating centralized political power inevitably spawns State/private-capital cartels that stripmine taxpayer/citizens. This cannot be avoided or staved off with 1,000-page legislative bills and 30,000 pages of regulations, all of which serve to consolidate the power of centralized government and private capital.

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