Purchasing Power

The end game of this global monetary crisis is the imposition of a 100% digital monetary system that would permanently end what little economic freedoms we still retain today. Educate. Resist. Fight Back. Win.

The housing market is sending mixed signals in 2012.

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.

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).

Experienced investors try to avoid the "confirmation bias" trap by asking what supports the other side of the trade. Confirmation bias is our instinct to find data to support our position once it is taken. To counter this bias, we must attempt to build a plausible case against our position. If the effort is sincere, we gain a fuller understanding of the market we are playing (or perhaps avoiding). That the global economy is going to heck in a handbasket is self-evident. If you over-weight anecdotal "on the ground" evidence and fade the ginned-up official statistics, it is obvious the global slowdown is picking up speed in Europe and China, two of the world's largest "linchpin" economies.

In any economy, “capital” is real wealth which has not been consumed. The production of new wealth is dependent on the supply of capital goods or factors of production - above all the tools essential to the task. A capitalist economy is impossible without a further form of capital - a medium of exchange or money. But money does not produce goods, it facilitates their exchange. Any money will do that, but SOUND money provides a still more important service. It allows for economic calculation. And without a reliable form of economic calculation, it is impossible to discover whether a given process of wealth production is viable or not. A SOUND money allows for the reliable calculation of profit or loss in any enterprise. By doing that, it acts to minimise the loss of real wealth by directing new capital into profitable uses and diverting it from uses which do not pay their way. This is the only process by which any nation can become prosperous. It is entirely short-circuited when the common denominator in all economic calculations - money - is produced by edict and not by effort. It has long been known that it is impossible to “create” wealth out of thin air. It has long been held that money and wealth are synonymous. It is now a tenet of market faith that when it comes to creating money out of thin air - literally anything goes. The contradiction is as glaring as it is ignored.

Maybe the real reason that the Treasury offered China direct access (thus cutting out the middleman and offering China cheaper access than ever) was precisely because China was selling, and because the Treasury was concerned about the effect on rates, and wanted to give China some incentive to keep buying. As Jon Huntsman noted in a 2010 cable leaked by Wikileaks, the PBOC has felt pressured to keep buying, and as various PBOC officials have hinted in recent months, China is actively seeking to convert out of treasuries and into gold. And that makes sense — treasuries are yielding ever deeper negative real rates. People holding treasuries are losing their purchasing power. No wonder the treasury is willing to cut Wall Street out of the deal. And it isn’t like the Treasury would have taken this move lightly — cutting Wall Street out of the equation is a slap in the face to Wall Street

The standard Keynesian narrative that "Households and countries are not spending because they can’t borrow the funds to do so, and the best way to revive growth, the argument goes, is to find ways to get the money flowing again." is not working. In fact, former IMF Director Raghuram Rajan points out, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side as technology and foreign competition means that "advanced economies were losing their ability to grow by making useful things." Detailing his view of the mistakes of the Keynesian dream, Rajan notes "The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.", and critically his conclusion that the industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.

Well, my hat is off to the global central planners for averting the next stage of the unfolding financial crisis for as long as they have. I guess there’s some solace in having had a nice break between the events of 2008/09 and today, which afforded us all the opportunity to attend to our various preparations and enjoy our lives.

Alas, all good things come to an end, and a crisis rooted in ‘too much debt’ with a nice undercurrent of ‘persistently high and rising energy costs’ was never going to be solved by providing cheap liquidity to the largest and most reckless financial institutions. And it has not.

Explaining why and how the global monetary system is failing, why it is too late to stop, what will come next, and why the crisis is only financial – not commercial.

You just have to admire Ron Paul for his non-flip-flopping tenacity.

There is so much #win (not to be confused with #yuan) in the following article from today's edition of China Daily, that we just felt compelled to post it in its entirety for three reasons: i) an article like this will never appear in the US press - here the best one could get is the calculation of the lack of power of one's easily borrowed Charmin'; ii) it contains the phrase: "There are no lies, just statistics" when discussing data released by the China's National Bureau of Statistics, iii) being on the front page of the paper, and addressing a topic near and dear to everyone: namely how much pay Chinese workers are receiving in absolute and relative terms, in an attempt to spin the data, it confirms what everyone knows - that more and more Chinese workers are getting antsy about the only number that matters: the bottom one. So without further ado, here is China Daily and "Calculating the power of your hard-earned yuan."

Collateral matters when it comes to assessing the value of the debt. If a bank lists the mortgages in its "assets" column at full value even though the underlying collateral (the houses) has lost much of their value, then the bank is grossly over-estimating the value and security of the mortgage. The bank's "assets" are based on phantom collateral. Take away $1 in collateral and you impair $4, $10, $20 or even $30 of debt. Recall that the vast majority of real estate equity and financial wealth is owned by the top 20%, with the majority of that concentrated in the top 5%. That means the bottom 80% own little collateral to leverage into debt. How about leveraging income into more debt? Since the top 10% receive almost 50% of the income, and most of the bottom 90%'s income goes to non-discretionary spending and taxes, then only the top 10% have discretionary income that can be leveraged into more debt.