If there was ever an article that should spark every British citizen to immediately shift their savings into physical gold this is it. Basically, proposals are on the table to change the way inflation is calculated for bonds that payout based on the rate of change in prices. Unsurprisingly, they are purposely attempting to use an alternative measure of inflation that allows substitution (so when people can no longer buy a steak and must spend the same amount of money on spam this shows up as no inflation)! If this goes through, it is blatant theft. This is why owning TIPS in the U.S. is a total fool’s game. They will mark inflation to whatever level they want at the end of the day. To whatever is most convenient at the moment. You know, just like the banks mark their balance sheets. But don’t take my word for it…
The reality that the global Status Quo has fixed absolutely nothing in four years is finally coming to roost in the global economy. Though there is an endless array of complexity to snare the unwary, the source of instability is both visible and easily understood: too much debt that will never be paid back. Making matters much worse, much of the money that was borrowed--by sovereign governments, local governments, households and private enterprises--was squandered on consumption or malinvestments, and so there are precious few assets or collateral underlying the debt. Even when there is an asset--for example, a vacant house in a vacant development in Spain, or a Greek bond--the market value is considerably lower than the purchase price. The reality is that trillions of dollars, euros, yen and renminbi in phantom wealth will disappear when the losses that have already taken place are finally recognized. Everyone in the world with exposure to the global economy will become poorer in terms of abundant money floating around buying goods and services as credit dries up and deleveraging wipes out trillions of dollars, euros, yen and renminbi of phantom wealth.
Deflation has effectively been abolished by central banking. But is it sustainable? The endless post-Keynesian outgrowth of debt suggests not. In fact, what is ultimately suggested is that the abolition of small-scale deflationary liquidations has just primed the system for a much, much larger liquidation later on. Central bankers have shirked the historical growth cycle consisting both of periods of growth and expansion, as well as periods of contraction and liquidation. They have certainly had a good run. Those warning of impending hyperinflation following 2008 were proven wrong; deflationary forces offset the inflationary impact of bailouts and monetary expansion, even as food prices hit records, and revolutions spread throughout emerging markets. And Japan — the prototypical unliquidated zombie economy — has been stuck in a depressive rut for most of the last twenty years. These interventions, it seems, have pernicious negative side-effects. Those twin delusions central bankers have sought to cater to — for creditors, that debt is wealth and should never be liquidated, and for debtors that debt is an easy or free lunch — have been smashed by the juggernaut of history many times before. While we cannot know exactly when, or exactly how — and in spite of the best efforts of central bankers — we think they will soon be smashed again.
The precautionary principle is typically defined as “if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific evidence that the action or policy is harmful, the burden of proof that it is not harmful falls on those taking the action.” In practice, the principle is utilized by government policy makers to ensure technological advances don’t pose too dire of an effect on the surrounding environment. This may appear a noble goal if one accepts the premise that the prime function of government is the protection of life and property. History proves otherwise as easily corruptible politicians have tended to grant exceptions to wealthy business interests which look to dump their waste in public-owned natural resources such as waterways. It is also clear judging by historical cases that socialization often results in environmental degradation. One look at the pollution in once-communist nations such as China or the former Soviet Union reveals that a lack of private property results in a type of moral hazard en masse as there is little incentive to preserve what you don’t officially own.
The recent elections in Egypt now lead to a showdown between the two top vote getters on June 16/17. The protagonists, Ahmed Shaiq (former PM for Mubarak and candidate of the military) vs. Mohammed Mursi (Muslim Brotherhood), pits two candidates most of the population really doesn’t want in the first place. Kind of like Obama vs. Romney. Where’s Ron Paul on the ballot, right? The problem here is Egypt’s position on the timeline of revolution. Egypt has gone through the 1st Stage of a government loosing its justification to govern, and now the 2nd Stage of a caretaker, or provisional government, is now coming to an end. However, no accommodation has been created to correct the deficiencies that caused Egypt’s Spring Revolution, and that spells trouble.
On the heels of Fitch's sovereign credit downgrade to A plus (the fifth-highest investment grade), Japan's government debt continues to swell. With its debt at over 200% of its GDP, the Land of the Rising Sun appears to be embarking on a trek into the debt-laden unknown. As with any well-known macro-trend, there are speculators eager to capitalize on it. A ballooning government debt is often associated with sovereign debt crises, as market shocks can send the interest rate paid on the debt to unsustainable levels. Coupled with Japan's shrinking population (and thus tax base), the country is setting itself up for a hairy situation (data for both charts are from the IMF's World Economic Outlook Database). Enter Kyle Bass, one of the few hedge fund managers who made a killing when he bet against housing during the subprime mortgage bust. He and his fund have now set their sights on Japan, specifically shorting Japanese yen and Japanese government debt. His thesis is simple: with a debt-to-GDP ratio over 200% and a contracting population, it's only a matter of time before a sovereign debt crisis sets in, thus triggering a rise in Japanese interest rates – which the government would be unable to service with a shrinking and aging tax base. So far this strategy hasn't worked as Bass intended: according to ValueWalk, Bass' fund lost 29% of its value in April alone. That's not to say Bass' assumptions are incorrect. But there are alternative ways of looking at Japan's situation.
I am a child of an age laden with illusory wealth, and have benefitted (for a short time at least) from the financial fakery of our economic system, as have many Americans. Most of us have not had to suffer through the unmitigated poverty, hopelessness, and relentless fear that are pervasive in harsher days. All our problems could be cured with money, especially government money, and as long as the greenbacks were flowing, we didn’t care where they came from. Ultimately, though, the ease of our well-to-do welfare kingdom has set us up for a cultural failure of epic proportions. Anytime a society allows itself to be conditioned with dependency, its fate is sealed. We do not know what crisis really is. Many Americans barely have an inkling of what it entails. We imagine it, in films, in books, and in our own minds, but the fantasy is almost numbing. We lose sight of the tangible grating salty rawness of the worst of things, while imagining ourselves to be “aware”. Most people today are like newborns playing merrily in a pit of wolves. Preppers, on the other hand, are those who seek to understand what the rest of the public goes out of its way to ignore. They embrace the reality and inevitability of disaster, and suddenly, like magic, they are able to see its oncoming potential where others cannot (or will not). The price they pay for this extended vision, however, is high…
Short of the complete destruction of a fiat currency, there is nothing that can demonstrate beyond doubt the shallowness of the promise to protect purchasing power that is being made on any day. There is no bright line separating performance from talk. With a gold standard, deception is much more difficult. Creating too much money will lead to redemptions that drain away the official gold stockpile. Everyone can see the inventory shrinking. If it shrinks to zero, then the managers of the system have failed, period. There is no ambiguity about it, and the politicians in charge at the time have little room for denial. The formal adoption of a gold standard holds no magic. It's just another promise. But it is a promise that carries an assured potential for egg-on-face political embarrassment if it is broken, and the only way for the people in charge to avoid that embarrassment is to refrain from recklessly expanding the supply of cash. That's why a gold standard protects the value of a currency, and that is why the politicians don't want it.
One of breakout standup routines from the late, great George Carlin was his 1972 monologue “Seven Words You Can Never Say on Television.” In the presence of polite company, I shall not repeat them… but rest assured, the routine is still hilarious to this day. I wish I could say the same about the Department of Homeland Security… I wish I could say this is all a big joke… that the government’s “377 words you can never use online” is just some stupid comedy routine. But it’s not. And you just can’t make this stuff. After vigorous resistance, the Department of Homeland Security was finally forced into releasing it’s 2011 Analyst’s Desktop Binder. It’s a manual of sorts, teaching all the storm troopers who monitor our Internet activity all day which key words to look for.
So Facebook keeps falling, and is now floating around the $27 mark. We’re a third of the way down to my IPO valuation of FB as worth roughly $2-4 a share (or 5-10 times earnings), although I wouldn’t be surprised for the market to stabilise at a higher price (at least until the next earnings figures come out and reveal — shock horror — that Facebook is terrible at making money). The really stunning thing is that even after all these falls, FB is still trading at 86 times earnings. What the hell did Morgan Stanley think they were doing valuing an IPO without any viable profit model at over 100 times earnings? The answer is that this was an exit strategy. This IPO was about the people who got in early passing on a stick of dynamite to a greater fool which incidentally is precisely the same bubble mentality business model as bond investors who are currently buying negative-real-yielding treasuries at 1.6% hoping to pass them onto a greater fool at 0.5% (good luck with that).
There is much hand-wringing about the vast income disparity in the U.S. between the top 5% and the bottom 25%, and precious little offered as a solution. Once again we are told the problem is "complex" and thus by inference, insoluble. Actually, it's easily addressed with one simple act: restore the minimum wage to its 1969 level, and adjust it for the inflation that has been officially under-reported. If you go to the Bureau of Labor Statistics Inflation Calculator and plug in $1.60 (the minimum wage in 1969 when I started working summers in high school) and select the year 1969, you find that in 2012 dollars the minimum wage should be $10 per hour if it were to match the rate considered "reasonable" 43 years ago, when the nation was significantly less wealthy and much less productive. The current Federal minimum wage is $7.25, though states can raise it at their discretion. State rates runs from $7.25 to $8.25, with Washington state the one outlier at $9.04/hour. In 40 years of unparalleled wealth and income creation, the U.S. minimum wage has declined by roughly a third in real terms. "Official" measures of inflation have been gamed and massaged for decades to artificially lower the rate, for a variety of reasons: to mask the destructiveness to purchasing power of Federal Reserve policy, to lower the annual cost-of-living increases to Social Security recipients, and to generally make inept politicians look more competent than reality would allow.
We know the U.S. is a big and liquid (though not really very transparent) market. We know that the rest of the world — led by Europe’s myriad issues, and China’s bursting housing bubble — is teetering on the edge of a precipice, and without a miracle will fall (perhaps sooner, rather than later). But we also know that America is inextricably interconnected to this mess. If Europe (or China or both) disintegrates, triggering (another) global default cascade, America will be stung by its European banking exposures, its exposures to global energy markets and global trade flows. Simply, there cannot be financial decoupling, not in this hyper-connected, hyper-leveraged world.
All of this suggests a global crash or proto-crash will be followed by a huge global money printing operation, probably spearheaded by the Fed. Don’t let the Europeans fool anyone, either — Germany will not let the Euro crumble for fear of money printing. When push comes to shove they will print and fiscally consolidate to save their pet project (though perhaps demanding gold as collateral, and perhaps kicking out some delinquents). China will spew trillions of stimulus money into more and deeper malinvestment (why have ten ghost cities when you can have fifty? Good news for aggregate demand!).
We are constantly told all our problems are too complex to be addressed with simple "big idea" solutions. Complex problems require complex solutions, we are assured, and so the "solutions" conjured by the Central State/Cartel Status Quo are so convoluted and complex (for example, the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act or the 2,074-page Obamacare bill) that legislators say they must "pass the bill to see what's in it." The real "solution" is to see that complexity itself is the roadblock to radical reformation of failed systems. Complexity is the subterfuge the Status Quo uses to erect simulacra "reforms" while further consolidating their power behind the artificial moat of complexity. Over the next three days, I will present three "big idea" solutions that cut through the self-serving thicket of complexity. Nature is complex, but it operates according to a set of relatively simple rules. The interactions can be complex but the guiding principles can be, and indeed, must be, simple. Big Idea One: Radically lower the cost basis of the entire U.S. economy. The cost basis of any activity is self-evident: what are the total costs of the production of a good or service? The surplus produced is the net profit which can be spent on consumption or invested in productive assets (or squandered in mal-investments).
Is there a bottom in housing? It is entirely possible. However, for all the reasons stated herein, both financial, economic and psycholgoical, the "calls" for a housing recovery may be a bit premature. This is particularly true if our estimation of an economic recession in the next 18 months comes to fruition. The strains on the housing market caused by a recession will cause a secondary decline in housing. The reality of a recession is not a question of "if" — it is only a question of "when" and how bad will it be?
There’s a rather peculiar tribe of people in northern Uganda known as the Ik that has completely mystified anthropologists for decades. You see, the Ik are unlike just about any other people on the planet in that they shun cooperation, community, and even family. Due to the constant disruption of national boundaries in Africa coupled with terminal drought and famine conditions, the Ik have a very limited means of survival. As such, their culture epitomizes the ‘every man for himself’ mentality. Family means nothing. One brother could be starving to death, and the other brother with a belly full of food, and neither would have the slightest thought of sharing. It simply does not register with them. Each member of the tribe typically spends long periods in isolation searching for food and water. Their only reason for marriage is simply that it’s more convenient to build homes in pairs. Nothing else is shared… and most of the time, an Ik husband and wife will seldom be home at the same time. Children are occasionally produced from conjugal relationships, generally because they scare off birds and pests from the agricultural fields. By the age of 3, Ik children are kicked out of the home and left to fend for themselves. And they’re not weaned off, either, it’s sink or swim. All of this sounds shocking to westerners.